Corporate
Governance Report

Corporate Governance Report

The Company is committed to upholding high standards of corporate governance which, it believes, is crucial to the development of the Company and protection of the interests of the shareholders of the Company. The Company has adopted sound governance and disclosure practices, and will continuously improve these practices and create a highly ethical corporate culture.

Composition of the Board

As at the date of this report, the board of the directors of the Company (the “Board”) consists of 14 directors (the “Director(s)”), including three executive Directors, Mr. Li Zhiming, Mr. Yu Qingming and Mr. Liu Yong; six non-executive Directors, namely Mr. Chen Qiyu, Mr. Ma Ping, Mr. Hu Jianwei, Mr. Deng Jindong, Mr. Wen Deyong and Ms. Guan Xiaohui; and five independent non-executive Directors, namely Mr. Yu Tze Shan Hailson, Mr. Tan Wee Seng, Mr. Liu Zhengdong, Mr. Zhuo Fumin and Mr. Chen Fangruo. To the knowledge of the Company, there is no financial, business and family relationships or material/relevant relationships among members of the Board or between the Chairman and the President.

Biographical details of the Directors are set out in the section headed “Biographies of Directors, Supervisors and Senior Management” of this annual report.

Major Responsibilities of the Board

The Board is the core of the Company’s corporate governance framework and it takes several roles in representing interests, supervising resources and coordinating interests. The main functions of the Board are strategic planning, guidance on operation management and inspection and supervision. The responsibilities of the Board include formulating operation plans and investment proposals of the Company, preparing the proposed annual budgets and final accounts of the Company, assessing the performance of the Company and overseeing the work of senior management; formulating and reviewing the corporate governance policies and practices of the Company.

The Board shall represent the long term interest of the Company and the interest of shareholders and related party when making scientific and strategic decisions, be effectively supervised and evaluated when controlling corporate resources and conducting operation management and maintain effective stimulation and supervision over the senior management when duly delegating its power to the senior management. The Board is the core of the Company’s corporate governance framework and its role is clearly separated from that of senior management. Being different from the function and duties of the Board, the senior management of the Company are mainly in charge of the Company’s production, operation and management; organizing the implementation of the Company’s annual business plan and investment proposal; drafting plans for the establishment of the Company’s internal management structure; drafting plans for the establishment of the Company’s branch offices; drafting the Company’s basic internal management system and formulating basic rules and regulations of the Company; within the authority delegated by the Board, appointing, changing or recommending shareholder representatives, directors and supervisors in its holding subsidiary or joint stock subsidiary; deciding on the establishment of the Company’s branches; and other powers delegated by the Board.

The Company has separated the roles of Chairman and President. The Chairman is responsible for managing the Board, steering the Board to formulate overall strategies and business development plans, ensuring the receipt of sufficient, complete and reliable information by each Director and the receipt of reasonable explanations for all the issues raised in the Board meetings. The President is responsible for managing the business of the Company and implementing policies, business objectives and plans formulated by the Board, and is accountable to the Board for the Company’s overall operation.

The Board has established an audit committee, a remuneration committee, a nomination committee, a strategy and investment committee and a legal and compliance committee. Please see below for the composition and responsibilities of the audit committee, the remuneration committee, the nomination committee, the strategy and investment committee and the legal and compliance committee. Each committee shall provide its recommendations to the Board based on its respective terms of reference. The decisions of the Board on such recommendations shall be final, unless otherwise clearly stated in the terms of reference of these committees.

During the Reporting Period, the Board made a lot of efforts in improving the corporate governance system of the Company and enhancing the corporate governance standards, including amending relevant internal management rules in accordance with the requirements of relevant laws, regulations and regulatory rules as amended from time to time, as well as the practice of the Company; monitoring and organizing the Directors and company secretary to participate in relevant training courses; regularly reviewing the Company’s compliance with the domestic and overseas regulatory requirements and its implementation of various internal corporate governance rules and policies, and reviewing the Company’s compliance with the Corporate Governance Code and the disclosures in the corporate governance report.

Changes of Directors, Supervisors and Senior Management

  • On 12 January 2018, as considered and approved by the meeting of the employee representatives, Mr. Zhang Hongyu was elected as an employee representative Supervisor of the fourth session of the Supervisory Committee of the Company, Mr. Yang Jun ceased to be the Company’s Supervisor.
  • On 12 January 2018, as considered and approved by the Board meeting, Mr. Lian Wanyong, Mr. Cai Maisong, Mr. Li Dongjiu and Mr. Zhou Xudong were appointed as the Company’s vice presidents.
  • On 9 March 2018, as considered and approved at the 2018 1st extraordinary general meeting of the Company, Ms. Rong Yan and Mr. Wu Yijian were elected as non-executive Directors of the fourth session of the Board. Mr. Li Dongjiu and Mr. Lian Wanyong ceased to be Directors and special committee members.
  • On 23 March 2018, as considered and approved by the Board meeting, legal and compliance committee was established which comprised Mr. Liu Zhengdong, Mr. Li Zhiming and Ms. Rong Yan, among which Mr. Liu Zhengdong served as its chairman, and the members’ terms of office were the same as that of Director.
  • On 24 August 2018, as considered and approved by the Board meeting, Mr. Cai Maisong was appointed as the Company’s joint company secretary, authorized representative and secretary to the Board, Mr. Liu Yong ceased to be the Company’s joint company secretary and authorized representative.
  • On 16 November 2018, as considered and approved by the Board meeting, Mr. Li Yang was appointed as the Company’s vice president.
  • On 28 December 2018, as considered and approved by the 2018 3rd extraordinary general meeting of the Company, Mr. Hu Jianwei was elected as a non-executive Director of the fourth session of the Board, Mr. Yu Qingming was elected as an executive Director of the fourth session of the Board and Mr. Chen Fangruo was elected as an independent non-executive Director of the fourth session of the Board. Mr. She Lulin, Ms. Rong Yan and Ms. Li Ling (two terms of office as an independent non-executive Director expired) ceased to be Directors and special committee members.
  • On 28 December 2018, as considered and approved by the Board meeting, the composition of special committees under the fourth session of the Board is adjusted as follows:

    Board Committee Chairman Members
    Strategy and Investment  Committee Mr. Li Zhiming Mr. Chen Qiyu, Mr. Ma Ping, Mr. Wang Qunbin, Mr. Hu Jianwei, Mr. Deng Jindong, Mr. Yu Qingming, Mr. Liu Yong, Mr. Tan Wee Seng and Mr. Chen Fangruo
    Nomination Committee Mr. Li Zhiming Mr. Wang Qunbin, Mr. Hu Jianwei, Mr. Yu Tze Shan Hailson, Mr. Liu Zhengdong, Mr. Zhuo Fumin and Mr. Chen Fangruo
    Audit Committee Mr. Tan Wee Seng Mr. Deng Jindong, Mr. Liu Zhengdong and Mr. Zhuo Fumin
    Remuneration Committee Mr. Liu Zhengdong Mr. Yu Tze Shan Hailson
    Legal and Compliance Committee Mr. Liu Zhengdong Mr. Li Zhiming and Mr. Yu Qingming
  • On 28 December 2018, as considered and approved by the Board meeting, Mr. Wu Yijian was appointed as the Company’s joint company secretary, authorized representative and secretary to the Board, Mr. Cai Maisong ceased to be the Company’s joint company secretary, authorized representative and secretary to the Board. On the same day, Mr. Wu Yijian ceased to be a Director and special committee members.
  • On 11 January 2019, as considered and approved by the Board meeting, the composition of Strategy and Investment Committee, Audit Committee and Remuneration Committee under the fourth session of the Board is adjusted as follows:

    Board Committee Chairman Members
    Strategy and Investment  Committee Mr. Li Zhiming Mr. Chen Qiyu, Mr. Ma Ping, Mr. Wang Qunbin, Mr. Hu Jianwei, Mr. Deng Jindong, Mr. Yu Qingming, Mr. Liu Yong, Mr. Wen Deyong, Mr. Tan Wee Seng and Mr. Chen Fangruo
    Audit Committee Mr. Tan Wee Seng Mr. Deng Jindong, Ms. Guan Xiaohui, Mr. Liu Zhengdong and Mr. Zhuo Fumin
    Remuneration Committee Mr. Liu Zhengdong Mr. Wen Deyong, Mr. Yu Tze Shan Hailson

    Note:
    Ms. Guan Xiaohui’s term of office as a committee member has taken effect when it was considered and approved by the general meeting on 8 March 2019, the term of office as a committee member was the same as that of Director. The composition of other committees remained unchanged.

  • On 11 January 2019, as considered and approved by the Board meeting, Ms. Wang Jie was appointed as the Company’s vice president.
  • On 8 March 2019, as considered and approved at the 2019 1st extraordinary general meeting of the Company, Ms. Guan Xiaohui was elected as a non-executive Director of the fourth session of the Board, and the appointment of her as a member of the audit committee took effect from the same day. Mr. Wu Yijian ceased to be a Director and special committee members.
  • On 22 March 2019, Mr. Wang Qunbin resigned as a non-executive Director of the fourth session of the Board.
  • On 22 March 2019, as considered and approved by the Board meeting, Mr. Deng Jindong, a non-executive Director and Mr. Tan Wee Seng, an independent non-executive Director have been appointed as members of the remuneration committee.

Board Meetings and General Meetings

The Board convened eleven meetings, six of which were by voting through communications, during the Reporting Period. Notices for regular Board meetings were given to each Director at least 14 days prior to the meeting.

During the Reporting Period, the attendance record of each Director at the meetings of the Board was as follows:

Directors Attendance/ No. of meetings held
Executive Director
Mr. Li Zhiming 11/11
Mr. Liu Yong 11/11
Non-executive Directors
Mr. Chen Qiyu 11/11
Mr. She Lulin (resigned) 11/11
Mr. Wang Qunbin (resigned) 11/11
Mr. Ma Ping(1) 10/11
Mr. Deng Jindong 11/11
Mr. Li Dongjiu (resigned) 1/1
Mr. Lian Wanyong (resigned) 1/1
Ms. Rong Yan (resigned) 10/10
Mr. Wu Yijian (resigned) 10/10
Mr. Wen Deyong 11/11
Independent non-executive Directors
Ms. Li Ling (resigned) 11/11
Mr. Yu Tze Shan Hailson 11/11
Mr. Tan Wee Seng(2)(10) --> 10/11
Mr. Liu Zhengdong(3) 10/11
Mr. Zhuo Fumin(4) 9/11

Notes:

(1) Mr. Ma Ping attended one meeting not in person but by his proxy, which was not included in the attendance.
(2) Mr. Tan Wee Seng attended one meeting not in person but by his proxy, which were not included in the attendance.
(3) Mr. Liu Zhengdong attended one meeting not in person but by his proxy, which were not included in the attendance.
(4) Mr. Zhuo Fumin attended two meetings not in person but by his proxy, which was not included in the attendance.

At Board meetings, the Company’s senior management reported the information of business activities and data of development of the Company to all Directors on a timely basis. The executive Directors also met with and consulted the non-executive Directors for their opinions on the Company’s business development and operations regularly. If any Director has conflict of interest in any proposed resolution to be considered at the Board meeting, such Director shall abstain from voting on such resolution.

During the Reporting Period, the attendance record of each Director at the general meetings was as follows:

Directors Attendance/ No. of meetings held
Executive Director
Mr. Li Zhiming 4/4
Mr. Liu Yong 3/4
Non-executive Directors
Mr. Chen Qiyu 4/4
Mr. She Lulin (resigned) 1/4
Mr. Wang Qunbin (resigned) 0/4
Mr. Ma Ping 4/4
Mr. Deng Jindong 1/4
Mr. Li Dongjiu (resigned) 0/0
Mr. Lian Wanyong (resigned) 0/0
Ms. Rong Yan (resigned) 3/4
Mr. Wu Yijian (resigned) 4/4
Mr. Wen Deyong 3/4
Independent non-executive Directors
Ms. Li Ling (resigned) 3/4
Mr. Yu Tze Shan Hailson 4/4
Mr. Tan Wee Seng 3/4
Mr. Liu Zhengdong 3/4
Mr. Zhuo Fumin 3/4

Training for Directors

On 26 June 2018 and 2 July 2018, newly-appointed Directors attended the training of director’s responsibility of Hong-Kong-listed company provided by the Company’s Hong Kong legal adviser DLA Piper UK LLP. On 27 August 2018 and from 28 November to 30 November 2018, the newly-appointed company secretary attended the Hong Kong compliance training of newly-appointed company secretary provided by DLA Piper UK LLP and the 48th joint member ECPD seminar provided by The Hong Kong Institute of Chartered Secretaries. On 28 December 2018, all the Directors attended the trainings of the latest amendments to the Listing Rules and director’s responsibility of Hong Kong-listed company.

Audit Committee

At the date of this report, the audit committee of the Company comprises five Directors, including three independent non-executive Directors being Mr. Tan Wee Seng, Mr. Liu Zhengdong and Zhuo Fumin and two non-executive Directors being Mr. Deng Jindong and Ms. Guan Xiaohui. Mr. Tan Wee Seng currently serves as the chairman of the audit committee. The primary responsibilities of the Company’s audit committee are to inspect, review and supervise the Company’s financial information and reporting process for financial information. These responsibilities include, among others:

  • making recommendations to the Board on the appointment, re-appointment and removal of the external auditor;
  • reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process in accordance with applicable standards; and
  • formulating and implementing policies on the engagement of an external auditor to supply non-audit services.
  • monitor integrity of the Company’s financial statements and annual report and accounts, half-year report and, if prepared for publication, quarterly reports, and to review significant financial reporting judgments contained in the statements and reports.

During the Reporting Period, five meetings were held by the audit committee. The attendance record of the committee members at the meeting during the Reporting Period was as follows:

Directors Attendance/ No. of meetings held
Mr. Tan Wee Seng 5/5/td>
Mr. Li Dongjiu (resigned) 1/1
Ms. Rong Yan 4/4
Mr. Wu Yijian 1/1
Mr. Liu Zhengdong(1) 3/5
Mr. Zhuo Fumin 5/5
Mr. Lian Wanyong 1/1

Notes:

(1) Mr. Liu Zhengdong attended two meetings not in person but by his proxy, which was not included in the attendance.

The audit committee has reviewed the audited consolidated financial statements of the Group for the year ended 31 December 2018. The audit committee believes that the Company has complied with all applicable accounting standards and regulations and made sufficient disclosures. The audit committee has reviewed all material internal control rules, including the financial and operational and compliance controls, as well as risk management in 2018. The audit committee was satisfied with the effectiveness and sufficiency of the internal control mechanism in its operations. In addition, the audit committee has also reviewed the adequacy of resources, qualification and experiences of employees in relation to the accounting and financial reporting function of the Company and the adequacy of training courses taken by the employees and the relevant budgets.

The audit committee has reviewed the remuneration of the auditors for 2018 and recommended the Board to re-appoint Ernst & Young as the auditors of the Company for 2019, subject to the approval of shareholders at the forthcoming annual general meeting.

Nomination Committee

At the date of this report, the nomination committee of the Company comprises six Directors, including four independent non-executive Directors being Mr. Yu Tze Shan Hailson, Mr. Liu Zhengdong, Mr. Zhuo Fumin and Mr. Chen Fangruo; one non-executive Directors being Mr. Hu Jianwei; and one executive Director Mr. Li Zhiming. Mr. Li Zhiming currently serves as the chairman of the nomination committee. The primary responsibilities of the Company’s nomination committee are to formulate the nomination procedures and standards for candidates for Directors. These responsibilities include, among others:

  • reviewing the structure, size and composition of the Board on a regular basis and making recommendations to the Board regarding any proposed changes;
  • assessing the independence of independent non-executive Directors;
  • making recommendations to the Board on relevant matters relating to the appointment or re-appointment of Directors, and the succession plans for Directors (in particular the Chairman and the President); and
  • formulating, implementing and reviewing from time to time the policy concerning diversity of Board members.

The nomination procedures of the Directors are as follows: the nomination committee shall firstly propose a list of candidates for Directors, which shall then be submitted by the committee to the Board for review; the Board shall then submit the relevant proposal to the general meeting for shareholders’ approval.

The examination procedures of the candidates for Directors are: (1) to collect, or require relevant department of the Company to collect the particulars of the occupation, education, designation, detailed work experience and all part-time jobs of the candidates and summarize the same in written materials; (2) to hold nomination committee meetings to examine the qualifications of the candidates in accordance with the requirements applicable to a Director and to state the opinion and recommendations on appointments in the form of proposals; and (3) to carry out other relevant work according to decisions of or feedback from the Board.

In order to ensure a diversity on the Board members and improve the Company’s corporate governance, the Board has approved the Board diversity policy formulated by the nomination committee, which summarized as: other than complying with relevant requirements under the relevant laws, regulations and rules (including but not limited to the Company Law of the PRC, the Listing Rules and the Articles of Association), the Company should also consider various diversity factors, including professional qualifications, industry experience, culture and education background, ethnicity, gender, age, etc. when designing the Board’s composition. The selection of candidates will finally be determined based on their merits and contribution to the Board. Meanwhile, the Company’s diversity policy also includes monitoring, reporting and reviewing system to ensure the effectiveness and successful implementation of the policy. The Company will set measurable objectives to implement the Board diversity policy and will review such objectives from time to time to ensure the suitableness and the progress on achieving these objectives.

During the Reporting Period, three meetings were held by the nomination committee. The attendance record of the committee members at the meeting during the Reporting Period was as follows:

Directors Attendance/ No. of meetings held
Mr. Li Zhiming 3/3
Mr. She Lulin (resigned) 3/3
Mr. Wang Qunbin (resigned) 3/3
Ms. Li Ling (resigned) 3/3
Mr. Yu Tze Shan Hailson 3/3
Mr. Liu Zhengdong 3/3
Mr. Zhuo Fumin 3/3

Remuneration Committee

At the date of this report, the remuneration committee of the Company comprises three Directors, including two independent non-executive Directors being Mr. Liu Zhengdong and Mr. Yu Tze Shan Hailson, and one non-executive Director being Mr. Wen Deyong. Mr. Liu Zhengdong currently serves as the chairman of the remuneration committee. The primary responsibilities of the Company’s remuneration committee are to formulate and review the remuneration policies and schemes for the Directors and senior management of the Company. These responsibilities include, among others:

  • making recommendations to the Board on the Company’s overall remuneration policies and structure for Directors and senior management of the Company;
  • determining the specific remuneration packages of all executive Directors and senior management, and making recommendations to the Board in relation to the remuneration of non-executive Directors; and
  • reviewing and approving performance-based remuneration by reference to corporate goals and objectives determined by the Board from time to time.

During the Reporting Period, nine meetings were held by the remuneration committee. The attendance record of the committee members at the meeting during the Reporting Period was as follows:

Directors Attendance/ No. of meetings held
Mr. Liu Zhengdong 9/9
Mr. Yu Tze Shan Hailson 9/9
Mr. Li Dongjiu (resigned) 2/2
Mr. Wu Yijian 7/7

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Strategy and Investment Committee

As at the date of this report, the strategy and investment committee of the Company comprises ten Directors, including three executive Directors, namely Mr. Li Zhiming, Mr. Yu Qingming and Mr. Liu Yong, five non-executive Directors, namely Mr. Chen Qiyu, Mr. Ma Ping, Mr. Hu Jianwei, Mr. Deng Jindong and Mr. Wen Deyong, and two independent non-executive Directors, namely Mr. Tan Wee Seng and Mr. Chen Fangruo. Mr. Li Zhiming currently serves as the chairman of the strategy and investment committee.

The strategy and investment committee is a special operating organization under and accountable to the Board. It is mainly responsible for conducting research and making recommendations on the long-term development strategies and major investment decisions of the Company, and supervising and reviewing the implementation of annual operation plans and investment proposals under the authorization of the Board.

During the Reporting Period, seven meetings were held by the strategy and investment committee. The attendance record of the committee members at the meeting during the Reporting Period was as follows:

Directors Attendance/ No. of meetings held
Mr. Li Zhiming 7/7
Mr. Chen Qiyu 7/7
Mr. She Lulin (resigned) 7/7
Mr. Wang Qunbin(1) (resigned) 2/7
Mr. Ma Ping(2) 6/7
Mr. Deng Jindong 7/7
Mr. Liu Yong 7/7
Mr. Li Dongjiu (resigned) 1/1
Mr. Wu Yijian 6/6
Ms. Li Ling (resigned) 7/7
Mr. Tan Wee Seng (3) 5/7

Notes:

(1) Mr. Wang Qunbin attended five meetings not in person but by his proxy.
(2) Mr. Ma Ping attended one meeting not in person but by his proxy.
(3) Mr. Tan Wee Seng attended two meetings not in person but by his proxy.

Legal and Compliance Committee

As at the date of this report, the legal and compliance committee of the Company comprises three Directors, including two executive Directors, namely Mr. Li Zhiming and Mr. Yu Qingming, and one independent non-executive Director, namely Mr. Liu Zhengdong. Mr. Liu Zhengdong currently serves as the chairman of the legal and compliance committee.

The legal and compliance committee of the Board is a special operating organization under and accountable to the Board. It is mainly responsible for promoting the rule of law of the Company and guide the Company's compliance management works.

During the Reporting Period, the legal and compliance committee did not hold any meeting.

Term of Office of the Non-Executive Directors

Name Position Commencement Date Expiry Date
Chen Qiyu non-executive Director 21 September 2017 20 September 2020
Ma Ping non-executive Director 21 September 2017 20 September 2020
Hu Jianwei non-executive Director 2018年12月28日 20 September 2020
Deng Jindong non-executive Director 21 September 2017 20 September 2020
Wen Deyong non-executive Director 21 September 2017 20 September 2020
Guan Xiaohui non-executive Director 8 March 2019 20 September 2020
Yu Tze Shan Hailson independent non-executive Director 21 September 2017 20 September 2020
Tan Wee Seng independent non-executive Director 21 September 2017 20 September 2020
Liu Zhengdong independent non-executive Director 21 September 2017 20 September 2020
Zhuo Fumin independent non-executive Director 21 September 2017 20 September 2020
Chen Fangruo independent non-executive Director 2018年12月28日 20 September 2020

COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

The Company has adopted all the code provisions contained in the Corporate Governance Code as the Company’s code on corporate governance. During the Reporting Period, the Company had complied with the code provisions set out in the Corporate Governance Code.

SECURITIES TRANSACTIONS BY DIRECTORS AND SUPERVISORS

The Board has adopted the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules (the “Model Code”) as the standards for governing the transactions of the Company’s listed securities by the Directors and the supervisors of the Company (the “Supervisor(s)”). Having made specific enquiries with all Directors and Supervisors, all of them confirmed that they had complied with the requirements set out in the Model Code during the Reporting Period.

REMUNERATION OF AUDITORS

The Company’s domestic auditors, Ernst & Young Hua Ming LLP and overseas auditors, Ernst & Young are the independent external auditors of the Group. The remuneration paid and payable by the Group to Ernst & Young Hua Ming LLP and Ernst & Young in respect of the services provided during the Reporting Period is as follows:

Services provided Fee paid and payable
Statutory audit service provided for 2018 RMB35,102,000
Non-statutory audit service provided for 2018 RMB1,316,000
Non-audit service – tax consultancy services RMB2,749,000

CONFIRMATION BY THE DIRECTORS AND AUDITORS

The Directors have reviewed the effectiveness of the internal control system of the Group. The review covered all the material aspects of its internal controls, including the supervision of the financial and operational and compliance affairs, as well as risk management.

The Directors are responsible for supervising the preparation of annual accounts in order to give a true and fair view of the financial position, operating results and cash flow of the Company during the year. For the purpose of the preparation of the financial statements for the Reporting Period, the Directors have selected appropriate accounting policies, adopted applicable accounting principles, made judgments and assessments that are prudent and reasonable and ensured the financial statements were prepared on a going concern basis. The Directors have confirmed that the Group’s financial statements were prepared in accordance with the requirements of laws and applicable accounting principles.

The Directors are not aware of any material uncertainties relating to events or conditions that may cast doubt upon the ability of the Company to operate as a going concern. The statement of auditors about their reporting responsibilities on the financial statements is set out in the section headed “Independent Auditor’s Report”.

SHAREHOLDERS’ RIGHTS

Two or more shareholders representing a total of over 10% (inclusive) shares carrying the right to vote at the meeting to be convened may sign one or more written requests of the same format and contents, and submitted to the Board for the convening of an extraordinary general meeting or a class meeting. The Board shall furnish a written reply stating its agreement or disagreement to convene the extraordinary general meeting or a class meeting within ten days upon receipt of such requisition.

When the Company convenes an annual general meeting, shareholders who individually or jointly hold five percent (5%) or more (inclusive) of the shares carrying on voting rights of the Company shall be entitled to propose new resolutions in writing to the Company. The Company shall include resolutions falling within the scope of power of the general meeting into the agenda of such meeting. Shareholders who individually or jointly hold three percent (3%) or more of the shares of the Company shall be entitled to propose temporary resolutions and submit the same in writing to the Board ten (10) days prior to the date of the general meeting.

The shareholders may put enquiries to the Board via the office phone number and email address of the Board office as stated in this annual report.

AMENDMENTS TO THE ARTICLES OF ASSOCIATION

In accordance with the requirements of relevant laws, regulations and regulatory rules, and taking into consideration of the practice of the Company, as approved by the general meeting held on 28 June 2018, the Company made certain amendments to issues including, among others, the change of business license number to unified social credit code, establishment of general counsel system and removal of Guangdong Southern Pharmaceutical Foreign Trade Co., Ltd. to avoid relationship of competing business. For details please refer to the circular of the Company dated 10 May 2018. As approved by the general meeting held on 21 September 2018, the Company made amendments to the business scope in the Articles of Assoication. For details please refer to the circular of the Company dated 6 September 2018.

EFFECTIVE COMMUNICATIONS WITH INVESTORS

The Group had made effective improvements in investor relations in 2018 under the leadership and support of the Board and management. The Group has participated in a number of investment forums and successfully communicated with many fund management companies through various means. The Group organized on-site visits to its logistics centers, distribution centers and retail drug stores for a number of fund management companies to facilitate investors’ direct understanding of and contact with the Company. The Company and its subsidiaries also received various fund investors for on-site visits. In the future, the Company will maintain continuous and effective communications with investors through road shows after the issuance of interim reports and annual reports as well as through general meetings.

IMPLEMENTATION OF NON-COMPETITION AGREEMENT

The independent non-executive Directors have reviewed the compliance by CNPGC of the “Non-Competition Agreement” and confirmed that CNPGC has complied with the terms of such agreement during the year ended 31 December 2018. At the same time, CNPGC also confirms to the Company that it has complied with the terms of the Non-Competition Agreement.

The independent non-executive Directors are not aware of any breach of the terms of the “Non-Competition Agreement” by CNPGC and therefore, no remedy action was taken by the Company during the year ended 31 December 2018.

In accordance with the “Non-Competition Agreement” entered into between the Company and CNPGC, if CNPGC or any of its subsidiaries (other than the Company) is aware of any business opportunity to own, invest in, participate in, develop, operate or engage in any business or company which directly or indirectly competes with the core business of the Company (the “Business Opportunity”), it will inform the Company of the aforesaid Business Opportunity in writing immediately in the first place. Whether to take up the Business Opportunity is up to the independent non-executive Directors.

During the Reporting Period, Directors (including independent non-executive Directors) did not make any decisions in relation to whether to exercise or terminate an option or a right of first refusal or take up or waive any Business Opportunity.

Risk Management and Internal Control

The Board has established a risk management and internal control system in accordance with the requirements of paragraph C.2 of the Corporate Governance Code of Appendix 14 of the Listing Rules and continues to monitor and review the effectiveness of its operation. The system is designed to manage rather than eliminate the risk of failure to meet business objectives, to promote effective and efficient operations, to ensure reliable financial reporting and compliance with applicable laws and regulations, as well as to safeguard the assets of the Group.

Characteristics of the Risk Management and Internal Control Organization System
In accordance with the requirements of Rule C.2.2 of the Corporate Governance Code of Appendix 14 of the Listing Rules, the Group has established a sound risk management and internal control organization system which includes the Board, its Audit Committee, management of the Group, the risk and operation management department, legal compliance department, audit department and other departments to ensure that the Group has sufficient resources, qualified and experienced staffs, training courses and related budget for risk management and internal audit. Each department of the Group serves as the frontline in risk management and internal control; and the risk and operation management department, legal compliance department and the management of the Group are the higher level supervisors for risk management and internal control; while the highest level of supervision is carried out by the Audit Committee under the Board and the audit department, an independent supervision department that conducts internal audit for the Group’s risk management system. As the highest decision maker for the Group’s risk management and internal control, the Board assumes the ultimate responsibility for the establishment of a sound risk management and internal control system as well as the effectiveness of the risk management work carried out across the Group.

Implementation of Risk Management and Internal Control
The Group reviews the effectiveness of the risk management and internal control systems every year and assesses all important aspects of internal control such as supervision on financial, operation and compliance affairs, etc. based on the five elements of internal control, namely, the internal environment, risk assessment, control activities, information and communication as well as internal supervision.

After the risk assessment, the number of major risks of the Company in 2018 is 3, namely cash flow and account receivable risk, investment decision risk, and business integration and control risk.

As for cash flow and account receivable, affected by industry policies such as “two invoice system” and zero mark-up, as the proportion of direct sales to hospital increased, the Company’s account receivable balance increased rapidly, account receivable turnover days went up, working capital pressure grew, bringing challenges to cash flow and account receivable.

As for investment decision, research might not be complete and sufficient during the phase of pre-investment, due diligence and project management might not be complete and thorough during the phase of making investment, some indicators of investment return in post-investment management projects might not be accurately quantified due to long cycle, bringing challenges to investment decision.

As for business integration and control, industry policies kept releasing, industry growth slowed down, profit margin continued to be squeezed, some subsidiaries’ development was incompatible or disconnected with headquarters development plan, corporate top system construction and business process were slow etc, bringing challenges to business integration and control.

In 2018, the Group formulated practical and feasible management proposals based on its actual situation and carried out effective risk management in various approaches.

Inside the Group, management strengthened its supervision management and review for strategy implementation. After the strategy was set, the Group gave more attention to strategy implementation and reviewed the effect of strategy implementation. The Board periodically organized strategy review work to understand the implementation progress of strategy and management’s feedback on strategy and supervised and encouraged the Company’s strategy to be effectively implemented to avoid mistakes.

Outside the Group, the Group strived to analyse market environment, policy trend and competition pattern, strengthened its annual planning review for headquarter and its subsidiaries. It continued to advance promulgation and supervision work for planning implementation and assigned the coordination of planning implementation to specific persons. It analysed the key development direction for next-stage planning implementation and provided its subsidiaries with practical and reliable analysis guidance of planning objective.

The Group strived to further improve its risk and internal control management system, establish sound system and procedures and implement its supervision work effectively. It also sought to carry out the risk control thoroughly by means of prevention in advance, supervision during the process and following up afterwards. In 2018, the Company held three compliance management committee meetings, launched on-site examination on five subsidiaries, completed amendment of Sinopharm Group Compliance Operation Manual, and trained employees on compliance management.

Meanwhile, the Group strengthened its management on each professional business in its headquarter as well as its supervision on and guidance to the secondary subsidiaries. It also enhanced its audit supervision and inspection on the implementation of key internal control systems by its subsidiaries in every level by conducting follow-up activities, inspection and ad-hoc audit thereon. Based on an interactive supervision mechanism, departments including, among others, the audit, legal compliance and discipline inspection departments cooperated in the supervision to form resultant force in order to strengthen management vulnerabilities, ensure implementation of the system, carry out rectification and follow-up activities and improve the accountability mechanism.

Formation of the Long-term Risk Management and Internal Control mechanism
Focusing on the overall strategic objective, the Group established the risk management system gradually by implementing the basic procedures of risk management in each stage of management and its course of business. It sorted out and identified potential risks thoroughly from the headquarter level to the operational level, developing a risk database of the Sinopharm Group, a systematic and sophisticated database peculiar to the Group, as the foundation of its risk management and internal control.

Every year, the Group instructs each department to identify, analyse and assess the material risks of the Group on the basis of the changing internal and external environment and taking into consideration the possibility and impact of the risk. In light of the actual operation and management of its professional business, each department formulates detailed risk management proposals against material risks on a case by case basis.

The risk and operation management department prepares the Report on Overall Risk Management of the Sinopharm Group annually to summarise the risk management work of the previous year and review the supervision, inspection and timely rectification of all material risks. The report also sets out the risk management plan for the next year as well as resources and events that need coordination and further instruction, and is finally submitted to the management and Board of the Group for approval.

The Group’s procedures for financial reporting and information disclosure, etc. are in strict compliance with the requirements of the Listing Rules. Office of Board of Directors enacted the Rules on the Insider Information Management in Sinopharm Group Co. Ltd., which was passed by approval of the Board, and has set up standard control procedures for information collection, classification, approval and disclosure. Prior to disclosing relevant information to the public, the Group will ensure that such information is absolutely confidential and will maintain a register and filing of insiders as required. The Supervisory Committee is responsible for the supervision of insider information management.

In the Board meeting held on 22 March 2019, the Board reviewed the risk management and internal control during the reporting period and concluded that there had been no deficiency in material risk control and they had not been aware of any weakness in material risk control based on the outcome of the risk management and internal control work implemented by the Group during the period from 1 January 2018 to the date of this Report. The Board was of the opinion that the risk management and internal control system of the Group is effective and sufficient.

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