中國石化 (SNP) 2017 Q4 法說會逐字稿

(Interpreted) Ladies and gentlemen, welcome to Sinopec 2017 results announcement. First, please allow me to introduce our senior executives: Mr. Dai Houliang, Vice Chairman and President; Mr. Wang Dehua, CFO; and Mr. Huang Wensheng, Vice President and Board Secretary.

Today's presentation covers two parts. First, Mr. Wang Dehua and Huang Wensheng will highlight 2017 performance in general and by segment and share 2018 production operation plans. Then we will have Q&A session. Now I would like to invite Wang Dehua, CFO, to present the performance highlights.

(Interpreted) Ladies and gentlemen, now I will brief for you our performance in 2017. In 2017 global economy recovered gradually while China maintained stable and sound economic growth with GDP up by 6.9%. International oil prices climbed up with fluctuations.

We witnessed the rapid growth of domestic natural gas demand. Economic growth led to rising demand for oil and chemical products. [Apparent] consumption for oil products up by 6.6%, chemical demand kept growing rapidly. [The parent] consumption of synthetic resin, synthetic fiber and synthetic rubber was respectively up by 8.6%, 5% and 6.4%.

In 2017 the Company actively addressed market changes focusing on growth, quality, profitability and restructuring. Following the supply side reform we focused on optimization cost reduction, market expansion, structure adjustment and risk (inaudible) which helped deliver solid operating results. Turnover and other operating revenues reached RMB2.36 trillion, up by 22.2%. EBIT was RMB88.3 billion.

Excluding one-off items including price floor policy gains, gains from M&A and impairment, EBIT at a preteen level increased by 45%, showing our advantage of integrated business structure and future development potential. Profit attributable to equity shareholders was RMB51.244 billion; EPS was RMB0.423, up by 9.8%.

We kept optimizing debt scale and structure interest-bearing debt down by RMB12.5 billion. That asset ratio continued below. Interest coverage ratio was 28, which placed us in a solid financial position. Net assets at year-end were RMB726.1 billion, up by 2.1%.

In 2017 net cash generated from operating activities was RMB190.9 billion. Net cash used in investing activities was RMB145.3 billion. Net cash used in financing activities was RMB56.5 billion. We further reduced the size of interest-bearing debt and maintained strong cash flow. Cash-on-cash equivalent at year-end was RMB165 billion, up 15.8%.

Considering the Company's profitability, cash flow and future development, the Board proposed a year-end dividend of RMB0.4 per share and full-year dividend of RMB0.5 per share with an estimated total payout of RMB60.5 billion, up by 100.8% year on year. The payout ratio was 118%. Based on average H share price in 2017, the annualized dividend yield was 9.7%.

We strengthened cost control; we enhanced competitiveness through improving efficiency and achieved remarkable results in cost reduction. Upstream we promoted cost effective development. Lifting cost was cut by 1.3%. Refining, we continue to move forward quality upgrading and structure adjustment, emphasize logistic cost control, unit cash operating cost was real under control.

Marketing, we cut big in logistic costs. Cash operating cost per tonne remained flat. Chemicals, we optimized feedstock mix, product slate and operation. All in cost down 0.3% year on year. In addition, we strengthened fund management to make good use of cash in hand. Financing cost of the year 3.27%, a lot lower than the market with a RMB5.05 billion decrease in financial costs.

For CapEx the Company focused more on development quality and efficiency, investment return and optimized capital projects. Capital in 2017 totaled RMB99.4 billion. For E&P was RMB31.3 billion, meaningful capacity building on (inaudible) shale gas and crude. Construction for LNG terminals get storage facilities and pipelines.

Refining RMB21.1 billion, meaningful new projects including Zhongke refining petrochemical project, refined products quality upgrading and refining structure adjustment. Marketing, RMB21.5 billion, meaningful refined product storage facilities, pipelines and service stations. Chemicals, RMB23 billion, meaning for adjustments of facilities, feedstock and product slate, as well as the acquisition of Shanghai SECCO interests.

In 2017 the Company pushed ahead with innovation driven strategy, deepened reform of R&D mechanism, [less] technology play is (inaudible). Upstream, technologies for the full NGL gas E&P, natural decline rate control for (inaudible) or (inaudible) have effectively sustained new discoveries and cost effective development.

Refining, we focused on technologies regarding product mix adjustment, quality upgrading, completed industrial test of C5 and C6 distillates isomerization of solid superacid catalyst technology. Chemicals, we made efforts in technology of high-end materials. We accomplished commercialization of low volatility PP for automobile and high transparency and low-blooming PP.

We filed 5,876 patent applications and 3,640 were granted. We won two first prizes and one second prize in national scientific and tech progress awards, two second prizes in national technology and innovation awards. Another two leading technology experts were elected respectively as members of Chinese Academy of Engineering and Chinese Academy of Sciences.

The Company actively implemented its green and low carbon strategy to integrated energy conservation, emission cuts and carbon reduction, but improved environmental risk can show efficiency and carbon asset management. We communicated more with local communities. We held 491 public open day activities with 25,000 participants from communities. This made us better understood.

We also helped local communities with infrastructure, education and medical services. We made great efforts in targeted property elevation investing RMB128 million for the year, another 28,000 people were lifted out of poverty. We continue to organize public welfare activities Warm Station program provided and also Lifeline Express cured for over 41,000 cataract patients.

Now I would like to invite Mr. Huang Wensheng, Vice President and Board Secretary, to present our results by each segment.

(Interpreted) Thank you, Mr. Wang. Now I will present 2017's operational results by segment. Through 2017 with low oil price we took measures to increase proved results and cut costs. In (spoken in Chinese) basin and Sichuan basin made new discoveries. We added proved reserves of 463 million barrels with the crude replacement ratio reaching 116%.

In oil development, adopting a cost effective approach, we continued to strengthen cost control at a reduced natural decline rate. In gas development we pushed forward capacity building in (spoken in Chinese) of Ordos and west of Sichuan and completed a 10 BCM shale gas capacity building in Fuling. Oil and gas production was 490 million barrels, up by 4.1% with gas output up by 19.1%.

We made great efforts to cut costs in upstream. Lifting cost was $16.44 per barrel, down by 1.3%. Crude realized price was $48.83 per barrel, up by 32.8%. Gas realized price was $5.44 per 1,000 cubic feet. For E&P operational loss was RMB44.5 million. Excluding asset impairment and selling trend to Eastern China gas pipeline equity in 2016 we significantly reduced operational loss by RMB15.9 billion and maintained positive cash flow.

In refining, with market approach optimized product slate and produced more strong demand high-margin products. In quality upgrading we completed GB-5 auto diesel quality upgrading and advanced the GB-6 quality upgrading. We leveraged the integrated structure against the market changes, exported more oil products and kept utilization rates high.

We also stressed marketing and services of refining byproducts. LPG, asphalt and other products had better profitability. We processed 239 million tonnes of crude, up by 1.3%. Thus we realized a refining margin is hitting historical high of refining. The refining margin is $10.29 per barrel. EBIT RMB66 billion, up by 15.2%.

In marketing, we utilized advantages in integrated business and marketing network, actively responded to oversupply in certain areas in China, which has fierce market competition; coordinated ore resources available; and achieved sustainable growth in sales volume and retail; improved marketing network, optimized the services station and pipeline layout and added more service stations and C stores.

We expanded natural gas for automobile market, the sales volume of which was up by 18.4%. We continue to increase non-fuel business scale and profitability. Non-fuel business profit was up by 48% with better cost control. Cash operating cost was effectively managed. EBIT for marketing was RMB34.6 billion year on year.

In terms of chemicals, we produced both basic and high end chemicals. Based on customer needs, we enhanced the R&D production and marketing, improved the product slate and produced more popular high-value products. We made best use of our network focused on targeted sales and expanded markets. The full-year chemical sales volume reached 78.5 million tonnes, marking a historical high, up by 12.2%.

We continue to optimize feedstock structure and reduce feedstock costs. Pushing forward production schedule improvement increased dynamic profitability evaluation and monitoring. And based on market conditions, planned production and operation and achieved good results.

2017 saw a robust demand and gross margin for chemicals at home. We also optimized the product slate and feedstock structure, managed the cost well. EBIT for this segment was also a historical best, which is RMB36.7 billion, up by 38.8%.

That's for 2017. Now let me brief you on our operational plan for 2018.

2018 is critical for China to realize a moderately proper society. We expect China's economy to grow steadily, which will bring up demand for oil products and petrochemicals. As China transforms its domestic energy mix, natural gas as clean energy will see rapid growth. It's expected in 2018 oil price will keep its stabilizing momentum.

We will continue to drive steady growth, enhance quality and profitability, deepen supply-side reform. And to our utmost -- to improve operational performance we will undertake the following work. For E&P we will maintain high efficiency exploration and cost effective production, increase proved reserves and expand resource base. Oil production will be stable and gas production will rapidly grow.

For refining, we will improve the product slate, add high-value products and complete the GB-6 quality upgrading as scheduled. For marketing we will fully expand markets, advance non-fuel business and enlarge is the sales volume and retail. For chemicals we will continue feedstock and product structure adjustments, promote tailor-made services, offer full process solutions and value added services to increase the sales volume.

In 2018 more emphasis will be placed on quality and returns of investments and optimizing investment projects. CapEx are budgeted at RMB117 billion. E&P, RMB48.5 billion mainly for capacity building gas pipelines and gas storage projects. Refining, RMB28.8 billion mainly for Zhongke refining and petrochemical projects, the GB-6 quality upgrading and structural adjustments of the refining business.

Marketing, RMB18.5 billion mainly for oil products, storage pipeline and service stations. Chemicals, RMB17.7 billion mainly for Zhongke project, Gulei project and an aromatics project and some structural adjustment projects. R&D facilities and IT projects RMB3.5 billion.

In 2018, with market oriented approach we will focus on improving efficiency and quality to realize better performance and deliver higher value to shareholders. Thank you very much.

(Interpreted) This is our performance announcement and operational plan for 2018. Now our second session, that is the Q&A session. (Operator Instructions).

Peter Gastreich from UBS. First of all, congratulations on your 2017 results and in particular a very generous dividend. Just a couple of questions. First of all, kind of a top-down strategy question. What will be your overall strategy for 2018 and beyond? In particular with a focus on your traditional and nontraditional fuel competitors?

And second of all, regarding the dividend itself, if you could please share a little bit about the considerations behind the 2017 dividend and also any guidance you could provide in terms of how we should think about the dividend policy or sustainability going forward? Thank you.

(Interpreted) Thank you very much for your question and just now Mr. Wang Dehua and Mr. Huang Wensheng presented 2017 performance and 2018 operational plan. In the past year we continued to deepen the supply side of structural reform, stressed more on quality and profitability by capturing benefits of the integrated structure and actively addressing market changes.

In upstream we maintained highly efficient exploration and cost-effective development and our natural gas production saw a remarkable growth of 19.1% and that is the result of our past few years' strategy and effort. And among these shale gas or unconventional gas production contributed to a quarter of our total production of natural gas.

In refining we continue, with our structural reform or structural adjustment, produced more gasoline and kerosene to meet the robust market demand, completed the quality upgrading for GB-5 oil products, made GB-6 oil products available to two plus 26 northern cities, ahead of schedule.

And in marketing, sales and marketing segment, non-fuel business profit continued to grow significantly. And high-value added gasoline as sales volume grew big and with the percentage reaching 30%. And in terms of chemical segment, the sales volume increased by 12%, hitting a historical high, and high-value added product percentage continued to grow.

One of the key takeaways here today is that for the past few years, with the belief that a well protected environment is a fortune in itself, we continue to invest more in environmental protection, proactively deployed campaigns like Clearwater and Blue Sky and energy efficiency improvement.

And with the increasingly more stringent regulatory requirements, all of our efforts have translated into new competitive edge. Especially in the chemical market we see a turnaround, it is due to the government's more stringent regulatory in terms of environmental protection. And currently we are working on a green corporation action plan which is planned to be released very soon.

Just now Mr. Wang Dehua stated that in the past year Sinopec has received an increase of 45% in terms of EBIT year on year. And at the same time we booked RMB21.8 billion in impaired losses for back performing and nonperforming assets and further solidifying our basis for future development.

And for the whole year the net profit increased almost 10% and net cash generated from operating activities was more than RMB190 billion and the CapEx for the year was about RMB99 billion. Interim payout was about RMB12 billion and the surplus cash was used to further reduce the debt and the yearend cash-on-cash equivalent increased by RMB23 billion compared to interim to RMB165 billion.

And currently the Company has abundant cash with a sound debt to asset ratio and a solid financial positioning. And based on the Company's profitability, cash flow and future development, the Board proposed a year-end dividend of RMB0.4 per share and a full-year dividend of RMB0.5 per share.

And the total payout for the year amounted to RMB60.5 billion with a dividend yield almost 10%, allowing the shareholders to share the achievements of our reform and development and, at the same time, maintain a solid financial position. And I really hope that the long-term shareholders of Sinopec are happy investors.

The year 2018 marks the 40th anniversary of China's opening up and reform. 35th anniversary of the former China Petrochemical Corporation and the 20th birthday of Sinopec Group. And standing on the new threshold the Company will align itself with national strategies and continue to deepen the supply side structural reform and expedite our transformation from high-speed growth to high quality development.

Over the past year Sinopec has developed into an oil nature in terms of scale. But in the later years our focus will place our quality of development and we will adjust our production -- product slate according to the market need and the transformation of the national energy mix.

And so, you may notice that from the report just now that there is no significant growth in terms of scale in 2018, but in terms of structure there will be tremendous changes. For one thing you will notice that the natural gas will continue to grow rapidly and our high-end products will account for a larger percentage in terms of the total.

And for the long-term we have set up some certain targets and we will use two or three years to climb up or move up to the [nate] and high-end of the value chain. And we will use two decades to build Sinopec into a world leading energy and chemical company that will survive and thrive in whatever environment. And in that direction everything is well on track.

And looking into 2018 the Company has reigned in the cost hype in the upstream and the natural gas production will continue to grow fast. Just yesterday the Company's shale gas reserves in Weiyuan shale gas field, Sichuan basin was officially approved by national authorities. And adding new reserves of over 100 billion cubic meters. And we have finished formulating the capacity building implementation plan and our aim is to build another major shale gas production base following Fuling shale gas.

And in terms of refining, chemical and quality upgrading and transformation measures, we will take concrete steps to maintain the momentum and with the mission of fueling for a better life in our mind. And we firmly believe that through all these efforts the Company will open up new potentials and room for future growth and will build Sinopec stronger and bigger and create more value and returns for our shareholders.

(Spoken in Chinese).

Good afternoon, gentlemen. It is Scott Darling from JPMorgan, thank you ever so much for your presentation. Just two questions. How can you reassure the market that this year you can manage a little bit better your E&P costs? So do you think that lifting costs can actually reduce even further than last year? That's my first question.

My second question -- have you actually canceled your marketing IPO? And if not, can you provide any sort of timings or your thoughts around marketing? Thank you.

Would you mind repeating the first question? Thank you.

Can you reassure the market that -- obviously your E&P costs are accelerating -- losses are accelerating yet the oil price is increasing. How can you reassure the market today that you've got a grip on your E&P costs, because I think many of us are not convinced you have?

(Interpreted) Thank you for your question. I will address the impairment loss question. Last year the Company wrote down RMB13.5 billion upstream assets. And I would make it clear that the impairment losses were booked based on our calculation block by block even within the same oilfield. And the write down assets are mainly located in the mature oilfields like some of the blocks in the Shengli oilfield and [Yungsu] oilfield and it is all based on our calculation of future cash flow.

And in terms of the upstream cost reduction, over the past few years our priority has been placed on reducing the lifting cost. But I think the core to cut cost is to increase reserves and improve E&P efficiency. And at the same time efforts were also made to improve the organizational structure and to cut down on workforce so as to increase efficiency.

And just as Mr. Dai Houliang stated, that we have intermediate-term targets for -- we will use two or three years to achieve [nate] and high-end achievements. And for the first three years, that's around the year 2020, our target is to reduce breakeven point for upstream to $50 per barrel.

(Interpreted) We will address the question about the marketing company. Sinopec is fully supportive of the IPO of the marketing assets. And I would also like to thank the support from the market. And actually the shareholders' meeting of Sinopec has already approved the IPO plan. And currently everything is under progress and the marketing company is making preparations for the IPO.

Concerning the time and location of the IPO, it is to be decided by the Board of Directors of the marketing company based on the process they made in terms of a regulatory approval and market conditions. And so far we do not have a definite timetable, but we are very supportive with the IPO and we are looking forward to your support in this regard.

(Spoken in Chinese).

(Interpreted) Thank you. I am from BOCI. I have two questions about the natural gas. And the first question is that in 2017 I noticed that the Company [checked and] reduced the natural gas reserves. I would like to know the reason.

And the second question is concerning the CapEx for 2018. I noticed that the CapEx for the upstream increased -- will increase significantly. And you mentioned the construction of new pipelines and natural gas storage facilities and I would like to know the specific figure.

(Interpreted) First, I would like to address the natural gas reserve question. Last year the Company produced 26 million cubic meters of natural gas and made new discoveries about 20 billion cubic meters. And I would say that the natural gas reserves were not reduced and there was no impairment losses booked. But because of the large production volume the reserves reduced a little bit.

And for the upstream CapEx for 2018, the CapEx for the upstream, the E&P, will be RMB24 billion, a little bit up from the previous year. And major pipelines that we will invest money in is the [Wenxung] pipeline and the connecting 123 pipeline. And our plan is to complete the construction of this pipeline by the year of 2019. And we see transportation capacity of 30 billion cubic meters.

And currently we are working on the first phase of this project with a capacity of 9 billion cubic meters. And our plan is to bring it online and fully operational at the end of this year.

And another project is a pipeline connecting (inaudible) to (inaudible). And the nameplate capacity for that pipeline is 6 billion cubic meters. But if further compressed the capacity can reach 16.8 billion cubic meters. And we are moving forward that project as scheduled and our target or our plan is to complete operational by 2020.

And just now Mr. Dai mentioned that our reserves in (inaudible) have been officially approved by the government with an addition of more of than 100 billion cubic meters of shale gas reserves. And we already put in place the implementation plan for capacity building and we are going to see a big increase in that regard.

(Spoken in Chinese).

(Interpreted) I have two questions. Actually I think today's announcement took place on a special day for our industry because today the RMB denominated crude futures began trading in China. And there is concern on the market that China is going to grab more say in the oil pricing. And I would like to know what is the take of the management on this issue and what's the Company's plan to -- or status of the Company's participation in the crude futures business?

And my second question is that recently the government has put in place a new consumption tax for fuel -- for oil products with a new levying mechanism, and which I believe will bring positive impact on oil producers and suppliers like Sinopec, but a negative impact on local or independent refineries. And I would also like to know the management's views on this issue.

(Interpreted) I will take your first question and Mr. Wang Dehua will take your second question. And for the oil futures, actually China is one of the largest oil importers and consumers in the world. And the new China crude futures on the market will provide more options for the market and a bigger platform and more ways to hedge.

(Interpreted) Sinopec is one of the largest energy producers here in China and last year we imported 210 million tonnes of crude oil, making us the biggest trader of crude oil in China accounting for 50% of the total.

So Sinopec will continue to be actively participating and supportive of crude futures that can reflect the new local market conditions. And Sinopec will leverage its cash in a flexible way and to buy crude oil in the global market and to increase our capabilities in risk management and fend off the oil price volatility.

And in addition, based on the market conditions and information, we will continue to adjust our production slate in terms of refined oil products and chemical products. And the information from the crude futures that will help us with the pricing and the trade of self produced oil production. For example, the crude oil from Shengli is also available for trade.

You're right that the government authorities have made it effective January 2, this year, that to regulate the improper contact of some of the oil products distributors of tax evasion for products like gasoline and diesel.

And generally speaking, after this new policy was enacted, the wholesale price for gasoline and diesel changed about RMB600 per tonne. And for Sinopec we have more than 30,000 service stations across the country and that is surely a big advantage for us. And we are fully supportive of the government's new policy.

(Spoken in Chinese).

(Interpreted) I have two questions. The first one is about the refined oil products. As we can see that the market will continue to grow steadily, but we see from the operational plan for 2018 that the Company's crude throughput will remain unchanged compared to 2017 and what is the reason behind? Is it because of the pressure coming from the new refining capacities to be put on stream at the end of the year?

And the second question is about the trade wall between China and the United States. Does it have any impact on the Company's practice of importing the US crude oil and exporting refined products?

(Interpreted) In terms of crude throughput the Company, actually -- the plan for 2018 is a little bit higher than that of 2017. And when we are working on a plan our major considerations are market demand and our profitability. And we will allow the market to play the decisive role in resource allocation. And in terms of volume, the crude throughput will grow only slightly but the structure will change.

And in terms of the structural improvement, we will produce more high-margin products like high spec gasoline that the market needs. And at the same time we will reduce the production of diesel. In 2017 the diesel to gasoline ratio was 1.17. And for the first two months of this year that ratio was 1.08. So you can see the structural improvement here.

And I will address your second question concerning the trade war between China and the United States. As you know, China and the United States are the world's two largest economies. And the trade war will have an active impact not only to the two countries but also ramifications to other countries in the world. And I firmly believe that the decision-makers of the two countries will have enough wisdom to resolve this issue appropriately.

And in terms of importing crude oil from the United States, actually we've begun this several years ago in terms of the layout and the planning. And in 2017, we imported crude oil from the United States with an amount of 5.5 million tonnes. And I think you all know the equation to calculate the refining margin is to deduct the crude oil purchase cost from the revenues for selling products.

And our effort is to reduce the unit cost. And in terms of the cost for purchasing crude oil, you know that WTI price is a little bit lower than Brent. And so, we plan to purchase more WTI linked to oil types in order to further improve our refining margin. Then we will continue with trading activities with the United States.

Thank you very much for the presentation. Neil Beveridge from Bernstein. I have two questions. The first one is your comments on shale gas. You mentioned it is significant investments going into shale gas.

I think a lot of people have written off China shale gas. You seem to be much more positive. Can you give us some indication of what margins you're making in shale gas and what sort of growth rates we should expect in your gas business overall over the next three to five years?

The second question is more of a longer-term strategic question. China's positioning itself to be a leader in EVs, which is obviously a big risk to your business. What sort of plans are you making today so that you are able to respond to this threat over the longer term?

(Interpreted). In terms of shale gas, actually the major contributor to the Company's shale gas production is from Fuling with 6 billion cubic meters of production for the year 2017. And the sales volume was 5.7 billion cubic meters. And for the past few years we have made great efforts in terms of the cost reduction. And now the all-in cost for shale gas production is RMB0.9 billion per cubic meter. And the profit for Fuling shale gas was about RMB2.7 billion.

And for natural gas production, last year the figure was 25.8 billion cubic meters. And this year our production, our plan is to produce 27.5 cubic meters of natural gas. And the year after next, that is in 2019, our plan is to produce 32.5 billion cubic meters. Of course that includes conventional and unconventional gas.

And by the end of last year we completed the capacity building of shale gas in Fuling with the capacity of 10 billion cubic meters. And as Mr. Dai pointed out, that in the future we will continue to make major efforts to develop shale gas around Sichuan basin. And I will say that the shale gas production will continue to be major contributors to our capacity and profitability clause in the future.

(Interpreted) Sinopec, as a vertically integrated energy and chemical Company, we paid a lot of attention to the development of electric vehicles. And since the year 2015 the electric vehicles has witnessed robust growth and many countries have put in place the policies to gradually phase out selling of fossil fuel powered traditional vehicles between the year 2025 to 2045.

And China is one of the largest consumers of electric vehicles with last year's sales volume about 777,000 cars. And that accounts for 2.7% of the incremental car ownership. And the ratio of electric vehicles -- electric car ownership to gasoline vehicles is 1%. And the major factors that influence the development of electric vehicles are the first one is that the batteries cannot last very long and that is a major concern or worries of the users.

And secondly, there is still more to do in terms of infrastructure. And the third is the hefty cost of the batteries and actually that cost accounts for 45% of the total cost of the vehicle. And actually for China the rapid growth of electric vehicles depend largely on the subsidies granted by the governments. But in recent years we've seen the subsidies decrease.

And in terms of the growth rate, electric vehicles grew very fast, but the absolute number is still very small. And so, we expect that the fuel cars will still play a dominant role in the market. And as a leading energy company we also made a lot of efforts in terms of R&D and how to invent new business models to better serve service customers. And our focus is always on the requirements or the demand of our customers.

(Interpreted) I would like to add a few points. I know that you pay high attention to this development of electric vehicles and our strategy is threefold. First, that we keep close track of the trends and the changes. And secondly, that technology and innovation to play the leading role. And third, to explore and to work or lay out before hand.

And actually the auto industry is very important for Sinopec and it is a master for us to keep close eye on the trend and the changes. And we also leverage our advantages in terms of R&D to develop new materials for battery, because I think battery is also within the business scope of the chemical industry.

And so, this is our overall strategy to address these changes. And actually the global oil majors all have made their predictions about the EV development and they all think that the inner combustion engine vehicles will continue to play a dominant role for a pretty long time.

Gentlemen, I am Tom Hilboldt. I am from HSBC. Thank you for receiving my question. Congratulations on a great result through the down cycle and thank you for the dividend.

Firstly, just on the refining business, Mr. Huang, you mentioned that the refining business is transitioning and you are changing the product structures. Can you just detail for us and 2017 how much of the profitability at the operating level was related to the inventory effect? And can you guide us on the 2018 normalized quarterly operating profit that we can expect from refining in this environment with the new configuration?

And the second question relates to your LNG business. Can you identify for us the LNG value chain economics? What is the import price and what is the economic impact of you importing LNG? And how can we look at that business in 2018 in terms of the potential impact on the operating profit for the E&P business?

(Interpreted) And for the refining margin I will address your question about the inventory in terms of the operation. Operating income is about RMB4 billion. And you can see that last year we further reduced the diesel to gasoline ratio and are continuing with the upgrading of gasoline products, increasing the production of high spec gasoline. And also we made efforts to control costs and achieve a refining margin of more than RMB10.

And currently all the gasoline and the diesel produced by Sinopec need to be GB-5 standards and 28% of gasoline and 22% of diesel even the standards of GB-6. But GB-6 fuel products are priced based on the GB-5 standards.

But as the government places more and more emphasis on environmental protection and they encourage more use of clean energy, I think that a higher price for premium products will take place in due time. And that will help to further increase the refining margin of the Company and also the sales revenue.

The next question about LNG, in 2017 we imported 5.6 million tonnes of LNG. And in terms of the profitability or profit, the profitability varies for different terminals. It is connected with the price for importing LNG. It is also concerned with the ratio of liquids to gas.

The selling price for liquefied natural gas was about 3,250, but the gas was only 2,000. And so, we will continue to optimize our network in terms of the LNG business and to adjust the ratio of liquids to gas. And in 2017 we did suffer losses in this regard, but I believe in 2018 the situation will improve. And with the new capacities in terms of pipeline and storage coming online, I believe that it will position us in a better place to sell our products and increase profitability.

(Interpreted) I would like to add a few points. In terms of the price of purchasing LNG from the international market, the price is basically oil linked, linked to the CIF price to Japan for the previous two and three months. And due to the shortage of the terminals and pipeline and storage facilities for last year for the purchasing of 5.6 million tonnes of LNG, we suffered a loss of around 3 billion.

And we are making great efforts to increase our capacities in terms of pipeline and storage with the (inaudible) pipeline and 123 storage facilities in the northern part of China.

(Spoken in Chinese).

Good afternoon. (Inaudible) from Macquarie. I have a question on your dividend policy. Can you comment if there's been a shift away from your typical earnings payout as a basis towards free cash flow now?

And in relation to that I would like to run one scenario by management if I may. Given what Brent has done so far this year, it looks like you can at least maintain your free cash flow outcome in 2018. Now given where you balance sheet is and assuming no M&A, can we expect a similar 60 billion dividend payment in 2018? Thank you.

(Interpreted) And concerning the dividend policy, I said before that the policy is -- according to the articles of association, is not less than 30% of the current year's profit. And for 2015 the payout ratio is 50% and 2016 is 65% and 2017 is 118%, or exceeding 30% threshold.

And for -- and the major reason is the robust -- or sound development of the refining chemical and marketing distribution segments that's generated good cash flow. And we would like to create more returns to our shareholders.

And with the abandoned cash flow, we will use this money at hand to implement our strategy for the [certain] five-year plan of the Company. And secondly, we will continue to maintain that dividend policy to provide more returns to their shareholders. And actually the Board of Directors of the Company have some very optimistic visions about 2018. And if that can come true I believe that dividend payout will be good for 2018.

(Spoken in Chinese) (Audio ends abruptly).

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.