中國石化 (SNP) 2017 Q2 法說會逐字稿

(interpreted)

Ladies and gentlemen, good afternoon. Welcome to Sinopec 2017 interim results announcement. First of all, I would like to introduce our senior executives: Mr. Wang Yupu, Chairman; Mr. Dai Houliang, Vice Chairman, President; Mr. Wang Dehua, CFO.

Today's presentation covers two parts. First of all, Mr. Dai Houliang will first highlight 2017 interim performance as well as future development initiatives for 2017 to 2019. Then Q&A session will be followed.

Now I'd like to invite Mr. Dai Houliang to present 2017 interim performance highlights.

(interpreted)

Ladies and gentlemen, now I will brief you on our performance in the first half. The first half recorded moderate global economy recovery and China's economy maintained a steady growth, with GDP up by 6.9%. As a result, domestic demand for oil products and chemicals grew fast, with apparent consumption of oil products up by 5.5% and fast growth in ethylene equivalent consumption.

We further impletate (sic) the strategy of value-oriented growth, innovation-driven development, integrated resources allocation, openness to cooperation, green and low carbon development, tapped potential business integration, responded to changes of markets and the consumption structures, focused on quality efficiency, and achieved very good performance.

E&P. Faced with low oil prices, we strengthened measures to increase reserves, promote efficiency and profitability with sustainable investment in exploration resulted in a number of new discoveries. Re-enhanced efforts in annual gas development and production was up by 16.3% year on year. Upstream loss was reduced by RMB5 billion, and positive free cash flow was generated.

In refining through supplying markets home and abroad and increasing exports, we kept our high utilization rates, optimized productive mix, and produced more high value-added products. Oil products upgrading was fastened with GB VI in 2 plus 26 cities in North China, ahead of schedule. And capacity reach of GB VI gasoline reaching 78.3% and diesel-to-gasoline ratio lowered to 1.15. EBIT for refining was up by 26.7% on a comparable basis.

In marketing, with our strength in integrated business and distribution network, sales volume grew by 1.4%, with the retail percentage of premium gasoline increased by 2.4 percentage points. Natural gas for automobiles was expanded, with sales up by 28.2%. Complementary effect between fuel and nonfuel businesses was intensified, with nonfuel business transaction value up by 50% and profit up by 63.6%.

In chemicals, we expanded our business volume by 13.6% year on year. We further adjust product slate, producing more high value-added products and maintaining a robust margin. EBIT increased by 34.9%.

The Company recorded significant growth in business performance. We realized RMB1.17 trillion of revenue, up by 32.6%. Profit attributable to shareholders was RMB27.915 billion, up by 40.1%.

We adjusted and optimized debt scale and structure, reduced interest-bearing debts by RMB9.6 billion, and maintained a sound financial position. As of June 30, debt to asset ratio was 43.2%, historically new low since IPO. Net assets was RMB717.7 billion, up by 0.9% compared with the beginning of the reporting period.

Net cash generated from operating activities was RMB60.8 billion, that from generating activities was RMB40 billion, and cash used for debt repayment was RMB16 billion. Cash and cash equivalents reached RMB160.8 billion, up by 12.9% compared with the beginning of the reporting period, providing strong backup for future growth.

In view of the Company's sustainable development needs, profitability, and cash flow, the Board proposed interim dividend of RMB0.1 per share. The interim dividend payout is expected to reach RMB12.1 billion, up by 26.6% year on year. We strengthened cost control, promoted competitiveness through improved efficiency, and achieved good results.

Upstream, we deepened reform of oil subsidiaries, pressed ahead with stringent development, and lowered lifting cost by 1.9% year on year. In refining, in addition to fuel quality upgrading and products mix adjustment, we cut cash operating costs by 2.6%.

Marketing. Facing competition, we lowered marketing cash operating cost by 1.2%. Chemicals. We further adjusted feedstock and products' structure and optimized facilities operation with unit all-in cost down by 4.3%. We enhanced fund management and brought down financial costs by RMB3 billion.

In investment, the Company focused more on development quality and efficiency and strengthened management for investment return. In the first half, CapEx was RMB16 billion. CapEx for E&P was RMB6.9 billion, for oil and gas production capacity development, LNG projects, and the construction of gas storage and natural gas pipelines.

Refining was RMB3.7 billion, mainly for regional refining and the chemical centers construction, oil products quality upgrading, and structural adjustment of product slate. Marketing and distribution was RMB2.5 billion, mainly for construction of oil products depots and pipelines as well as service stations.

Chemicals: RMB2.6 billion, mainly for structural adjustment of facilities feedstock and product mix projects. We will evaluate capital projects and piece up investment in projects of good return.

In the first half, we maintained a safe and steady operation by strengthening identification and control of risk. We actively implemented green and low-carbon development practices, pushed ahead integrated management of resources and environment, made solid efforts on pollution control, and further carried out energy efficiency. Hazardous chemicals, wastewater, gas and solid were treated 100%.

Now I would like to invite Mr. Wang Dehua, CFO, to present results by each segment.

(interpreted)

Thank you, Mr. Dai. For the first half, with low oil prices, we maintained exploration intensity and new oil discoveries were made in Tahe Basin, Junggar Basin, Shengli Oilfield, and North Jiangsu Basin. In Sichuan Basin and Ordos Basin, new gas discoveries were made.

In development, we were profit-oriented, adjusted development structure, and focused on cost control. In the first half, production was 220 million barrels of oil equivalent, up by 1.1%. Crude production was 150 million barrels, down by 5.3%. Gas production: 452.1 Bcf, up by 16.3%.

For the first-half upstream, we took great efforts to cut costs, with lifting cost at USD15.72, down by 1.9%. Realized crude price was USD47.49, up by 43%. Realized gas price was USD5.26. E&P loss was RMB17.4 billion, RMB5 billion less than the first half of 2016. The segment realized a positive free cash flow.

We actively responded to market oversupply, used the two markets to increase export, and we maintained tight utilization rate. We processed 118 million tonnes of crude, up by 1.6 billion (sic - see slide 17 "1.6%").

We constantly optimize our product mix to produce more kerosene and gasoline. With in-house technologies, we upgraded oil products with cost competitiveness. With international trading, we lowered crude cost. We focused on other petroleum products, marketing, and services, with increased sales in LPG and asphalt.

For the first half, realized refining margin was USD9.38 per barrel. That is 4.6%. Cash operating cost was USD3.33, down by 2.6%. Realized EBIT was RMB29.8 billion. Excluding influence from the price floor policy in the first half of 2016, EBIT was up by 26.7%.

For the first half, with integrated business model and marketing network strength, we actively coped with domestic oil products oversupply and a fierce competition and achieved a continuous growth in sales volume and profitability. We optimized the marketing structure, optimized all the resources, and expanded retail for premium gasoline.

We grew automotive natural gas business, accelerated gas stations construction and operations, and automotive natural gas sales volume was up by 28.2%. We optimized the gas stations and oil products pipelines network, increased the numbers of gas stations and convenience stores.

For chemicals, we continue the basic and high-end development concept and increased the effective supply. Based on margin and gross profit contribution to scheduled operations, ethylene production was up by 2.4%, optimized the feedstock structure, further lowered feedstock cost.

We better integrated production, sales R&D, and application, and performance compound ratio was 62%, up by 4 percentage points. Synthetic fiber differential ratio was 88.2%, up by 4.9 percentage points.

With low inventory operation and our marketing network strength, we conducted a differentiated and tailor-made marketing, providing --. Chemicals sales volume was 37.3 million tonnes, up by 13.6%. Chemicals -- demand for the first half, the realized EBIT was RMB16.5 billion, up by 34.9%.

Now let me brief you our operational plan for the second half. Looking to the second half, we will continue our structural reform on the supply plan and then promote our profitability.

For the upstream, we will maintain exploration efforts and for 100% reserve replacement ratio before the year ended to complete the 10 bcm shale gas capacity. Building annual oil and gas production will increase by 2%. For refining, we will optimize product mix, actively promote quality upgrading, produce more high value-added products, and maintain high utilization rates.

Three: for marketing, we will expand retail volume, expedite nonfuel business, and expand domestic oil products business scale. Four: for chemicals, we will seize opportunities to maintain high utilization rate and expand sales volume.

So for the second half, we will stress our market orientation, fully utilize our integrated business strength, strive to hit our annual targets, and deliver excellent results.

Now Chairman Wang Yupu will discuss develop initiatives for 2017 to 2019. Thank you very much.

(interpreted)

Thank you very much, dear friends from the capital market. Thank you for your long-term support and cooperation. In the first half of this year, faced with fluctuating low oil prices and the competition into domestic refined oil products and chemicals markets, we managed to achieve steady business development, strong financial position, and ample cash flow.

In upstream, reserve base was further improved. Natural gas production and marketing volume were significantly increased. Operating loss was reduced by RMB5 billion and positive free cash flow was generated.

Refining -- we continued with phasing out less competitive capacity to increase economies of scale and maintained our high utilization rates and [fastened] oil products quality upgrading and products late adjustment. EBIT was increased by 26.7%.

Marketing. Sales further expanded, with cash operating cost per tonne down by 1.2%, while profit was up by 8%. Particularly, nonfuel businesses kept robust growth, with transaction volume up by 50% and profit up by 63.6%.

As for chemicals, high value-added products grew fast and the segment profit was up by 34.9%. The Company's profit was up by 36.5% and profit attributable to shareholders was up by 40.1%.

In recent years, faced with dramatic decline in oil prices and intense market competition, we unleashed the synergy of our business integration, deepened reform, focused on innovation, and sharpened our competitive edge on all fronts, leading to stronger profitability and a strong position and high level of dividend payout ratio.

We have won recognition from the markets and our H-share price has increased by 34% since 2016, outperforming comparable peers regarding the related indexes. These achievements made were a result of implementing the national development concepts and the corporate strategies.

The management's goal of delivering good business results and shareholders' return aligns with that of our shareholders, whose support and highly value and critical in achieving the above results. I would like to thank the shareholders in particular for our kind understanding and the support.

Also, I would like to mention that we have written the CPC party organization into the Articles of Association. Thank you for your support and understanding again. This is instrumental in our efforts to establish modern corporate governance with Chinese characteristics.

Sinopec today is in a new development phase. China's economy is expected to maintain steady growth and reform with energy sector will deepen further. New energy and new materials we grew fast, and platform economy as well as sharing economy are set to boom, presenting huge market potential and opportunities for our Company.

On the other hand, international oil prices will stay low for a considerably long period, while domestic markets will be more open and competitive. Sinopec as an industry leader will always be searching for solutions to sustainable development.

On August 25 this year, the Board of Directors reviewed and approved the development initiative for 2017 to 2019 on the basis of 2016 to 2020 development plan. Now I would like to collaborate (sic) the key points of the initiatives.

Upstreams. We will stress our high efficiency exploration, profitable development, and cost control. We'll focus on crude sustainability. We will maintain investment intensity and give priority to eastern basins with [fort] formations, [Shunbai] marine phase, carbonate rock formation in Tarim Basin, and the classic rock formations of the Junggar Basin. And we have seen very good momentum in reserve [production].

In frontier areas, more economic reserves will be developed to increase capacity. In mature fields, efforts will be made to improve recovery and solidify reserve base. Our target is to achieve breakeven for oil production by 2020 at current oil prices.

More efforts will be made in natural gas value chain to increase reserve and production capacity. Focus on natural gas is to promote value chain development. We will accelerate E&P invest Sichuan, and orders. Complete Fuling 10 billion bcm capacity building and development areas in Sichuan South, Southeast, and Southwest so as to reach 40 bcm capacity by 2020.

By then, we will have completed 10,000 kilometers of pipelines, including Ordos to Anping to Cangzhou, the southern section of [Qianjiang-Shaoguang Huizhou], Phase II of Sichuan to West China storage facilities. Also, our equity pipelines will total 13,000 kilometers.

Our pace towards end-users market we will fasten to optimize sales production, overseas LNG, and domestic supply to integrate market resources, connecting transmission pipelines and network, and improving infrastructure.

Natural gas will be an important growth contributor for the Company. We welcome investors to join us in the natural gas business for continued mixed ownership reform so as to meet the 300 bcm of gas demand by 2020.

Refining and chemicals are Sinopec's core businesses. They are central to our structural reform on the supply side. For refining and basic chemicals business, the focus is to optimize layout, realize integrated development, and seek for sustained growth. We will speed up the elimination of outdated capacity and increase industry concentration.

For the next three years, we will invest RMB140 billion for the 4 regional refining and chemical centers in Maoming-Zhanjiang, Zhenhai, Nanjing, and Shanghai to optimize resources allocation, strengthen our competitiveness, and promote innovation and profitability so that our segment will be optimized.

New chemical materials business is strategic to our future growth. Supported by the production of basic chemicals feedstock, we will adopt a market-oriented approach, develop a series of high-end materials, including specialty resin, elastomer, fiber, lightweight automotive materials, and energy-conserving and environment-friendly materials so that we can be more competitive in this regard.

For promising business that are fit for independent operation, we will adopt a technology-plus-services-plus-market strategy to promote mixed ownership reform and advanced institutional innovation and realize IPO when appropriate.

So for marketing, Sinopec marketing company has realized operation on a mixed ownership and is now deepening its institutional reform to advanced shareholding reform and IPO process. We look forward to a continued support in this matter.

Faced with fierce competition, we are paying more attention to customer experience and giving full play to our existing marketing network. We will reinforce the fuel business, continue to create new sources of revenue in nonfuel business, transform service stations into a multi-dimensional service ecosphere that integrates fuel filling, charging and battery changing, convenience stores, car services, fast food, and insurances, etc. These new businesses will stimulate the whole segment's growth.

To realize a sustained development, deepened reform, incentive reinforcement, openness to cooperation, we will press ahead with the R&D institutional reform, focus on major R&D projects, speed up breakthroughs in core technologies, and promote the application of R&D results. We will strengthen the integration of information technology and industrialization for the utilize cloud computing, Internet of Things, and Big Data, and boost the digital Internet-oriented intelligent and more effective production in our operation.

We plan to have growing patents of applications, increased contribution rate of science and technology to over 65%, and enable 40% of our subsidiaries to become leading innovative enterprises so as to support the Company's transformation and achieve better results.

We will actively develop the platform economy. The Company enjoys world's largest retail network of refined oil products, serving more than 20 million customers per day. We own a platform that sources over 300 million tonnes of crude every year.

We also operate EPEC, China's biggest industrial products sourcing platform, and [Chemi mall], the e-commerce platform for commodity chemicals. Together with various investors and partners along our value chain, we will establish a more diversified and open business environment, providing better services to the society and customers.

We will always pursue green and low carbon development and attach more importance to CSR fulfillment. The Company is pushing ahead with the implementation of a green development action plan, providing more clean energy and environment-friendly products to sustain economic civilization of the nation.

Each year, Sinopec's test and fees contribution exceeds RMB300 billion, in addition to promoting common development of companies along the industry value chain and creating millions of jobs for the nation. In the recent two years, efforts were made as far as targeted poverty alleviation.

With our business network, we helped the poverty-stricken areas to develop their own unique businesses and move out of poverty. For instance, together with Tibet, we jointly invest in, develop, and sell [drama] spring water in over 30,000 service stations home and abroad, which promoted the economic development of Tibet and its employment rate.

We are active in the belt and road initiative. Recently we invested in refining and refined oil products marketing business in South Africa and Botswana, extending our overseas business towards marketing and services in the future. More efforts will be made to achieve integrated development of oil and gas refining, storage, and global trade.

We will establish an international operational platform for coordinated development of the value chain and build ourselves into a first-class comprehensive petrochemical service provider around the belt and road. We are confident that with the support from our shareholders and friends, Sinopec will be able to address all kinds of challenges and grow in strength, scale, and excellence. We will create greater value for the nation, shareholders, and employees so as to realize a healthy and sustainable development.

Thank you very much.

(interpreted)

Thank you, Mr. Wang. Thank you, Mr. Dai and Mr. Wang Dehua. Now Q&A session. The management will take questions from the floor. In order to have as many questions as we can, please identify yourself before you raise your question. And we expect you to limit the number of your questions to two. Table number nine.

(interpreted)

The question is from Citi. First one, regarding the discount and promotion at the gas stations, it seems this activity has a negative impact on the Company's second-quarter profit.

So the question is can the management share the updated situation for the third quarter? The second question is the marketing company IPO seems to be delayed. Could the Company share the latest update as well?

(interpreted)

Regarding the gas stations profit, as everyone knows that the Chinese government has given the imported crude quota to independent refiners. Therefore, the supply sources for refined products in China has been more diversified.

In this background, the Company has been very active in responding to those market and policy changes and have taken related measures. Therefore, our competition is not only in providing discounts for the customers, but rather comprehensive measures, including utilizing our strength in branding, network, and integration.

This could be seen from the good business performance results in the first half, which we just announced -- just now we announced that. And the profit as well as the market sales volume have also grown in the first half.

Regarding the specific impact on the profit in the third quarter, we'll release and make detailed announcement when we announced the third-quarter results.

Regarding the second question for the IPO program or timetable for marketing company, I'd like to thank your interest and support in this matter. Currently, the Company is filing relevant approval to relevant government authorities and we are pushing forward this work.

However, there are still some uncertainties and issues to be addressed. Therefore, we could not share a specific table timetable when the IPO would be realized. However, I can assure you that we are doing all our best to push forward this work as well. Thank you.

Yes, thank you very much for the presentation and the lunch, as always. Two questions from Bernstein. First of all, the Company is generating a lot of cash. Free cash flow was very strong. You are sitting with an enormous amount of cash on your balance sheet. Almost no net debt.

Can you talk a little bit about what you plan to do with that cash? Should we expect further corporate development, further M&A? And can you talk a little bit about if there was to be M&A, would it be upstream or would you look to build further on the downstream business?

The second question is about the dividend. You have raised the dividend for the first half of the year. Can you talk a little bit about what the dividend policy is exactly and whether or not we should expect a higher dividend again as we go into the second half of the year?

(interpreted)

Thank you for the question of cash flow. Due to the low oil prices environment and the Company's strength in integrated business model, we have been generating very strong cash flow and also high return from our investment.

Regarding the CapEx, the Company's first-half actual capital expenditure was RMB40 billion instead of RMB16 billion in the first-half report due to the different accounting standards.

And regarding the future, the Company is holding abundant cash flow in the aim of responding to market changes and volatility. And secondly, we also are focusing on the corporate value and maintain the debt level at a reasonable level.

Regarding the future priority. Chairman Mr. Wang just now has mentioned the Company will continue to unleash the integrated strength in refining and chemical plus marketing. At the same time, we will also look at the upstream opportunities to improve our reserve base and assets portfolio.

Regarding the second question for dividend payout policy, we have been stating that the policy remain unchanged. That is, according to the Articles of Association, dividend payout should not be less than 30% of the Company's profit. So as I said, the policy remain unchanged and we increased the return to our shareholders in view of the Company's strong profit generation capability.

As for how much will be the dividend be for the second half, this will depend on the whole year earnings situation. However, I assume the second half will be a little bit higher than the first half.

(interpreted)

Chairman would like to add that Sinopec is also very active in the national belt and road initiative to look at any potential promising opportunities globally. For upstream, it could be the oil and gas assets oilfields. For downstream, it could be refining, chemical, or marketing projects.

So whenever there is the right project, we will very actively look at it. And actually, we have been making some substantial progress on reviewing those assets. In addition, as you can see, we have abundant cash flow; however, we have actually detailed plan as for how to use those cash on specific projects.

(interpreted)

The question is from Morgan Stanley. The first one is the Company announced that in the first half, the high octane number gasoline proportion in total products was increased significantly.

And the question is what specific impact does this have on the Company's performance or earnings? And a follow-up question is is this positive impact specifically in the refining business segment or in the marketing segment?

And a second question regarding the different situation for retail and wholesale plus distribution. Retail had seen decrease in terms of percentage and wholesale plus distribution have seen more than 6% increase. So the question is what are the reasons behind? Is there a shift in the corporate strategy for the marketing segment? And if so, what will be the future impact?

(interpreted)

Thank you very much for the really insightful question. The changes were mainly due to the market consumption structure changes.

Regarding the high octane number gasoline or diesel production, we've seen significant change in the market for higher-end automotive use. And on the other hand, there is also government policy requirements that we need to upgrade the products' quality to GB VI, both for gasoline and diesel. Therefore, the Company produced more high octane number fuels and the sales volume also increased by a big margin.

As for your question whether this positive impact is reflected in the refining segment or the marketing segment, I would say this has a positive impact on both business segments. And internally, we also have made relevant arrangement as to incentivize the refining subsidiaries to produce more premium products and at the same time also incentivize the marketing subsidiaries to sell more premium products.

For the change in retail and marketing distribution at wholesale, these were also because of the market changes. As you know, the government has opened the quota for imported crude oil since last year and more suppliers is entering this retail market.

They have also got some service stations from the local governments. Therefore, there are more supply in the retail market. However, we are still utilizing our strength in branding and network and quality so as to increase the retail volume as much as possible.

As for the increase in distribution and wholesale, this was mainly due to the market demand increase. Overall speaking, we will further tap our integrated strength in marketing to increase both the retail volume and total business volume. Thank you.

(interpreted)

The question is from BOCI. The first question regarding the realized natural gas price. The Company has seen a decrease in realized price, while the other suppliers in the market have seen an increase in realized gas price. So what is the reason?

The second question is regarding the Company's three-year development initiatives, which mentions the Company will further develop the downstream value chain for natural gas. What exactly does this mean? Does it mean that the Company will develop -- or enter into the town gas business? And if so, what does the Company have specific in mind?

(interpreted)

For realized gas price, the numbers in the report are in US dollars terms. However, in domestic China, the gas is priced actually with RMB. The first-half realized price for the Company's gas was RMB1,276 per cubic meters, and for the first half of 2016, it was RMB1,275 per cubic meters. Therefore, the number we have seen is actually not a decrease. It is relatively flat.

And we also made some comparison with our peer companies. The realized price difference were possibly due to the supply structure changes.

(interpreted)

For the downstream value chain for natural gas, we are aiming at retail plus end-user supply and power generation using natural gas. Our strengths are in resources, in pipelines networks, as well as gas storage facilities.

And we also seize the opportunities of peak consumption -- winter peak for consumption of natural gas. And therefore, we will not only develop the existing customers and markets, we will also form some joint ventures or cooperation with cooperative partners for newly developed markets and customers.

[Tis Rish] from Macquarie. I have one question on refining. On your 3-year RMB140 billion CapEx plan, could you provide some details on capacity? Is there anything being added or is this merely an upgrading exercise?

Is there a target product slate in mind once complete? And also, can you speak on the potential margin benefit that management expects once this upgrade is complete? Thank you.

Sorry, can you repeat the first part?

On the CapEx, is there any capacity being added on the RMB140 billion upgrade? Second is any product slate target in mind? Third is any incremental margin benefit management can speak about?

(interpreted)

For the CapEx in the product slate adjustment, the government is practicing a policy that is premium quality should be sold at better prices or higher prices. Therefore, the market players are making investment in response to these policies and to the market consumption structure.

The Company is also evaluating projects and making decisions on investment so that the return could meet the Company's hurdle rate of return. Let me share with you in more details an example. We are producing the GB VI standards gasoline and diesel according to the government-issued GB VI standards.

And the government is evaluating what specific the cost would be for the Company, and including -- that includes the upgrading CapEx. Therefore, the government will give a guidance price for GB VI standards fuels, which must be higher than the GB V fuels. Thank you.

Tom Hilboldt from HSBC. Firstly, let me congratulate you on some very tremendous results over this very difficult period. My questions relate to the exploration and production business specifically.

The Company talked about -- the management team talked about a three-year plan out to 2020 on liquid production and sustaining liquid production at the current level at current oil prices. I guess my question on the liquid volumes is would you expect those volumes to fall down and then get back up to current levels?

Or are you really targeting sustaining the 290 million barrels of liquid production at the current level? If so, what is the cost now of that liquid production?

The related question on the gas side is you talked about 40 billion cubic meters of capacity for natural gas over the intermediate term. I am wondering if you have any guidance for us with regard to what kind of utilization of that capacity you might expect over the intermediate term. Obviously, I know it depends on the market development, but maybe you can give us some context for that?

Then additionally, what are the intermediate targets for LNG sales, which are newly disclosed by you? And for the gas storage capacity. Thank you.

(interpreted)

For the upstream liquids production target, we aim to maintain this current level for the coming three years. And at the same time, what we will focus on will be cutting our cost for upstream liquid production.

And meanwhile, if there is other promising and economic reserve added, we might also increase the liquid production. However, for the time being, we aim to keep the current level.

Secondly, regarding the crude price, crude cost, our total crude production cost is $45 per barrel. However, this is different from the breakeven point. When we say breakeven point, we need to add the tax and other issues for consideration. Therefore, our breakeven is $60 per barrel.

For natural gas capacity and production, you are right in our capacity target is to reach 40 billion. And we will produce as much as possible, or in other words, we will try to reach 100% utilization.

However, you were also very right in mentioning that the production will be arranged according to market changes. For instance, different situation in the winter or in the summer. Therefore, we are also focusing the storage facilities construction.

We've completed some gas storage facilities and we are building new ones. Therefore, we will be better able to adjust the consumption in different seasons. In the meanwhile, we will also increase the LNG business volume, including import and sales. Thank you.

It's Scott Darling from JPMorgan. Just a few questions. Your business plan mentions focus on returns. If we assume the current oil price level, what type of returns by the end of your business plan, if you meet all your initiatives, should shareholders here expect? Just roughly guidance.

Second question is your largest chemical producer or one of in the world. Where do you think we are in the chemical cycle? I think there is a market perception that, particularly for ethylene derivatives, that next year is a downturn. What is your comments to that?

And then coming back to E&P costs, your plan assumes you will try to get this breakeven level. If, say, JPMorgan is right, we have a flat $50 oil view on a 3-year view-ish. That means really you will only be able to get to $50 breakeven by 2020. How can you accelerate cost reduction in your E&P? Because your competitors seem to be doing that a lot better than you guys do. Thank you.

Could you please elaborate the first question regarding the return?

Okay. So you've got -- for your business development plan, you've got the last slide on page 36 focused on returns. So let's assume your low oil price view is right. Let's say $50 roughly where we are now-ish. What, if you deliver on all your plans in the various slides here, could investors expect at the end of your business plan in terms of returns?

(interpreted)

Regarding the specific return we expect at the end of the three years term, the Company has made very detailed plan to achieve all those targets. And it is our aim to provide as high return to the shareholders as possible. However, due to listing rules requirement, we cannot share with you a specific return number.

Regarding the chemicals cycle, it's true that this industry is very cyclic. And it's also forecasted that since next year, particularly the second half of next year, the polyolefins will go downwards. As part of the reason is that US-produced NGL-based polyolefin products will be supplied to the markets.

However, this is a global market and in different geographic regions the situations are different. For instance, in China, since the beginning of next year, there will be a new -- the policy will ban imported wasted plastic. This will, according to our estimate, translate to 10% increase in demand for plastics in China.

Therefore, we believe the chemicals market have the cyclic feature. However, we are integrated in the chemicals business and we will see different products grow in different scenarios.

Our Chairman just now also mentioned we will focus on the high value-added chemicals and new materials. And we believe through a period of hard effort these new materials and high value-added products will be another big profit contributor for the Company. Thank you.

(interpreted)

I would like to take your question regarding the cost control. Currently, the Company's breakeven point is $60 per barrel for upstream and we aim to bring down the E&P cost.

And this has been the focus by the management from the very beginning. And our target is to lower the breakeven point from $60 to $55 by 2020. And the major measures, including the first to increase the reserve quality, particularly to increase the economic reserves for oil and gas, our target for reserve replacement ratio by 2020 is to be above 100% or even to achieve 150%.

(interpreted)

Regarding the cost control, we have been making and remitting efforts and we were able to cut operating loss by RMB5 billion for the first half. And among those measures, technology innovation and advancement have been very effective in reducing cost.

In exploration, we will focus particularly on high-efficiency explorations. And in development and production, we are focusing on the profit of barrels developed and produced. We have seen good results through those efforts.

And a second approach will be to deepen reform, which will be market-based and -oriented. And the aim is also to improve the profitability of upstream. And we are very confident in this.

(interpreted)

The question is regarding how the Company viewed the difference between the price -- the net value per share and the price.

(interpreted)

Thank you very much for the question. The Company has also been paying high attention to the corporate share price performance. And it's our ultimate aim to create more value and return to the shareholders.

And only through increasing the profitability of the Company and generate sufficient cash flow can we achieve this target. And the share price is actually reflected by the capital markets.

Our Chairman just now mentioned in the past year, the Company's share price outperformed related indices as well as our peer companies. He also blueprinted the coming three-year development initiatives, and we are very confident by implementing those strategies we will be able to increase the corporate value as well as the return to our shareholders. As for the share price, actually you decide the share price. Thank you. (spoken in Chinese)

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.