Sinopec Engineering Group Co Ltd. — Proxy Solicitation & Information Statement 2021

Aug 22, 2021

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

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中石化煉化工程（集團）股份有限公司 SINOPEC Engineering (Group) Co., Ltd. (a joint stock limited liability company incorporated in the People’s Republic of China) (Stock Code: 2386)*

ANNOUNCEMENT

RENEWAL OF THE GENERAL SERVICES FRAMEWORK AGREEMENT, THE TECHNOLOGY R&D FRAMEWORK AGREEMENT, THE LAND USE RIGHTS AND PROPERTIES LEASING FRAMEWORK AGREEMENT, THE FINANCIAL SERVICES FRAMEWORK AGREEMENT AND THE ENGINEERING AND CONSTRUCTION SERVICES FRAMEWORK AGREEMENT AND THE ANNUAL CAPS AND

CONTINUING CONNECTED TRANSACTIONS AND MAJOR TRANSACTIONS THEREUNDER THE FINANCIAL SERVICES FRAMEWORK AGREEMENT AND THE ENGINEERING AND CONSTRUCTION SERVICES FRAMEWORK AGREEMENT

References are made to the Company’s announcement dated 21 August 2018, and the Company’s circular dated 18 September 2018 (the “ Previous Announcement and Circular ”). On 21 August 2018, the Board reviewed and approved, among other things, the proposed resolutions in relation to the terms under the General Services Framework Agreement, the Technology R&D Framework Agreement, the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement (the “ Framework Agreements ”), the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps for each of the years ending 31 December 2019, 2020 and 2021, respectively, pursuant to which, the General Services Framework Agreement, the Technology R&D Framework Agreement and the Land Use Right and Properties Leasing Framework Agreement were renewed for three years, with a valid term from 1 January 2019 to 31 December 2021. Meanwhile, the Board also approved to convene an extraordinary general meeting for the Independent Shareholders to consider and, as appropriate, approve (among other things), the proposed resolutions in relation to the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps.

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References are also made to the Previous Announcement and Circular, and the Company’s poll results announcement for the extraordinary general meeting held on 26 October 2018. The Company reviewed and approved the resolutions in relation to the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps for each of the years ending 31 December 2019, 2020 and 2021, respectively, at the first extraordinary general meeting of the Company for the year of 2018 held on 26 October 2018, pursuant to which, the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement were also renewed for three years, with a valid term from 1 January 2019 to 31 December 2021.

Since the Framework Agreements will expire on 31 December 2021, the Group and Sinopec Group entered into a series of supplemental agreements on 20 August 2021, renewing each of the Framework Agreements for another three years, pursuant to which, the valid term of each of the Framework Agreements will be from 1 January 2022 to 31 December 2024, subject to the Independent Shareholders’ approval of the renewal of the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement.

On 20 August 2021, the Board reviewed and approved, among other things, the proposed resolutions in relation to the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, and to convene the EGM for the Independent Shareholders to consider and, if thought fit, approve, among other things, the above proposed resolutions. Sinopec Group and its associates will abstain from voting at the EGM in respect of the above proposed resolutions.

As each of the highest applicable percentage ratios of the proposed annual caps in respect of the continuing connected transactions under the General Services Framework Agreement, the Technology R&D Framework Agreement and the Land Use Rights and Properties Leasing Framework Agreement exceeds 0.1% but is less than 5%, thus, in accordance with the Hong Kong Listing Rules, such transactions shall be subject to the reporting, annual review and announcement requirements under Chapter 14A of the Hong Kong Listing Rules but exempted from the Independent Shareholders’ approval. As each of the highest applicable percentage ratios of the annual caps in respect of the continuing connected transactions under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement exceeds 5%, thus, in accordance with the Hong Kong Listing Rules, such transactions shall be subject to the reporting, annual review, announcement and the Independent Shareholders’ approval under Chapter 14A of the Hong Kong Listing Rules. Meanwhile, since each of the highest applicable percentage ratios of the proposed annual caps in respect of the services of deposits and entrustment loans under the Financial Services Framework Agreement and the engineering services provided by the Group to Sinopec Group and/or its associates under the Engineering and Construction Services Framework Agreement exceeds 25%, such transactions will also constitute major transactions of the Company on an aggregated basis, and are subject to the announcement, circular and Independent Shareholders’ approval under Chapter 14 of the Hong Kong Listing Rules.

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The Company will convene the EGM for the Independent Shareholders to consider and approve (if think fit), among other things, the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the continuing connected transactions and major transactions contemplated thereunder and the proposed annual caps. An Independent Board Committee comprising all the independent non-executive Directors has been formed, to advise the Independent Shareholders on approving above resolutions, and advise the Independent Shareholders as to how they should vote in respect of the above resolutions and other issues. Maxa Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. Sinopec Group and its associates will abstain from voting at the EGM in respect of the ordinary resolutions to approve the above matters.

A circular containing, amongst other things, (i) further details of the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the connected transactions and major transactions contemplated thereunder and the proposed annual caps; (ii) a letter from the Independent Board Committee; (iii) a letter from Maxa Capital; and (iv) the notice of the EGM, will be dispatched by the Company to the Shareholders as soon as practicable.

I. INTRODUCTION

References are made to the Company’s announcement dated 21 August 2018, and the Company’s circular dated 18 September 2018 (the “ Previous Announcement and Circular ”). In this announcement, unless the context otherwise requires, the capitalized terms used herein shall have the same meanings as those defined the Previous Announcement and Circular. On 21 August 2018, the Board reviewed and approved, among other things, the proposed resolutions in relation to the terms under the General Services Framework Agreement, the Technology R&D Framework Agreement, the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement (the “ Framework Agreements ”), the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps for each of the years ending 31 December 2019, 2020 and 2021, respectively, pursuant to which, the General Services Framework Agreement, the Technology R&D Framework Agreement and the Land Use Right and Properties Leasing Framework Agreement were renewed for three years, with a valid term from 1 January 2019 to 31 December 2021. Meanwhile, the Board also approved to convene an extraordinary general meeting for the Independent Shareholders to consider and, as appropriate, approve (among other things), the proposed resolutions in relation to the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps.

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References are also made to the Previous Announcement and Circular, and the Company’s poll results announcement for the extraordinary general meeting held on 26 October 2018. The Company reviewed and approved the resolutions in relation to the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps for each of the years ended 31 December 2019, 2020 and 2021, respectively, at the first extraordinary general meeting of the Company for the year 2018 held on 26 October 2018, pursuant to which, the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement were also renewed for three years, with a valid term from 1 January 2019 to 31 December 2021.

Since the Framework Agreements will expire on 31 December 2021, the Company and Sinopec Group entered into a series of supplemental agreements on 20 August 2021, renewing each of the Framework Agreements for another three years and revising the proposed annual caps for each of the years ended 31 December 2022, 2023 and 2024, respectively, pursuant to which, the valid term of each of the Framework Agreements will be from 1 January 2022 to 31 December 2024, subject to the Independent Shareholders’ approval of the renewal of the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement.

On 20 August 2021, the Board reviewed and approved, among other things, the proposed resolutions in relation to the terms under the Financial Services Framework Agreement, the Land Use Rights and Properties Leasing Framework Agreement and the Engineering and Construction Services Framework Agreement, the renewal of the continuing connected transactions thereunder and the revision of the proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, and to convene the EGM for the Independent Shareholders to consider and, if thought fit, approve, among other things, the above proposed resolutions. Sinopec Group and its associates will abstain from voting at the EGM in respect of the above proposed resolutions.

As each of the highest applicable percentage ratios of the proposed annual caps in respect of the continuing connected transactions under the General Services Framework Agreement, the Technology R&D Framework Agreement and the Land Use Rights and Properties Leasing Framework Agreement exceeds 0.1% but is less than 5%, thus, in accordance with Chapter 14A of the Hong Kong Listing Rules, such transactions shall be subject to the reporting, annual review and announcement requirements under Chapter 14A of the Hong Kong Listing Rules but exempted from the Independent Shareholders’ approval. As each of the highest applicable percentage ratios of the annual caps in respect of the continuing connected transactions under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement exceeds 5%, thus, in accordance with Chapter 14A of the Hong Kong Listing Rules, such transactions shall be subject to the reporting, annual review, announcement and the Independent Shareholders’ approval under Chapter 14A of the Hong Kong Listing Rules. Meanwhile, since each of the highest applicable percentage ratios of the proposed annual caps in respect of the services of deposits and entrustment loans under the

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Financial Services Framework Agreement and the engineering services provided by the Group to Sinopec Group and/or its associates under the Engineering and Construction Services Framework Agreement exceeds 25%, such transactions will also constitute major transactions of the Company on an aggregated basis, and are subject to the announcement, circular and Independent Shareholders’ approval under Chapter 14 of the Hong Kong Listing Rules.

The Independent Board Committee has been formed to advise the Independent Shareholders on the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the continuing connected transactions and the major transactions contemplated thereunder and the proposed annual caps.

II. GENERAL SERVICES FRAMEWORK AGREEMENT

1. Provision of General Services by the Group to Sinopec Group

• (a) Principal Terms

Signing Date and Term

The Company entered into a general services framework agreement with Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021 (collectively, the “ General Services Framework Agreement ”). Pursuant to the supplement agreement dated 20 August 2021, the term of the General Services Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024. Relevant subsidiaries or associated companies of both parties will enter into separate contracts which will set out the specific terms and conditions according to the principles provided in the General Services Framework Agreement.

Service Scope

Pursuant to the General Services Framework Agreement, the Group will provide training and other services to Sinopec Group and/or its associates.

Pricing Policy

The pricing of the relevant products and services provided under the General Services Framework Agreement shall be determined in accordance with the following principles in ascending order:

• (1) government-prescribed price and government-guided price: if at any time, the government-prescribed price is applicable to any particular product or service, such product or service shall be supplied at the applicable governmentprescribed price. Where a government-guided fee standard is available, the price will be agreed within the range of the government-guided price;

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• (2) market price: the price of the same or similar products, technology or services provided by an Independent Third Party during the ordinary course of business on normal commercial terms; and

• (3) agreed price: to be determined by adding a reasonable profit over a reasonable cost.

The general services provided by the Group to Sinopec Group mainly include: (1) the welding training provided by the Group to Sinopec Group (“ Welding Training Services ”); and (2) the all-system daily safety operation training and safety technology R&D services within Sinopec Group provided by the Group as entrusted by Sinopec Group (“ Safety Operation Training Services ”).

Historically, there was no government-prescribed price or government-guided fee standard that was applicable to the Welding Training Services provided by the Group to Sinopec Group. Therefore, the pricing of the Welding Training Services is determined mainly by reference to the agreed price, which is not lower than the price of similar welding training provided by the Group to any Independent Third Party. If, during the term of the General Services Framework Agreement, there is any mandatory government-prescribed price or government-guided fee standard specifically applicable to the Welding Training Services to be provided by the Group to Sinopec Group, the Group and Sinopec Group shall also be obliged to use the applicable government-prescribed price or agree on the price of such services within the range of the government-guided fee standard (as appropriate). Meanwhile, for the Safety Operation Training Services provided by the Group to Sinopec Group, the price is determined mainly by reference to the market price. For the determination of the aforementioned price of general services, please refer to the sub-section headed “– (e) Basis of Caps” of this announcement.

Termination

Before the termination of the General Services Framework Agreement, the parties may, according to the Hong Kong Listing Rules, negotiate and enter into a new framework agreement or extend or renew such framework agreement to ensure the normal running of the production operations of the relevant parties after expiration of the term of the General Services Framework Agreement.

(b) Commercial Rationale and Benefits of the Transactions

The Welding Training Services and Safety Operation Training Services provided by the Group to Sinopec Group are compulsory trainings for all subsidiaries of the Sinopec Group. By providing such training services, the Group’s training centers will be able to expand service scale and thus increase the service revenue of the Group.

(c) Historical Amounts

The revenue generated from the provision of the general services by the Group to Sinopec Group and/or its associates for the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021 were approximately nil, nil and RMB2.27 million, respectively.

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(d) Existing and Proposed Annual Caps

Existing Annual Caps

The existing annual caps for each of the years ended 31 December 2019, 2020 and 2021 are set out below:

2021 are set out below:
	For	the years ending
		31 December
	2019	2020	2021
		(RMB’000)
Total Fees	9,000	9,000	9,000

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 are set out below:

Proposed Annual Caps

Proposed Annual Caps
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Total Fees	9,000	9,000	9,000

(e) Basis of Caps

In determining the above annual caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, the Company has considered the following:

• (1) for the Welding Training Services provided by the Group to Sinopec Group, since Sinopec Group did not request for Welding Training Services from the Group as at 31 December 2019 and 2020 and the six months ended 30 June 2021, the respective transaction amounts in relevant years and period were nil, nil and nil. Taking into account Sinopec Group’s needs for Welding Training Services from the Group in the coming three years, the Group will remain the original annual caps of RMB9 million unchanged; and

• (2) for the Safety Operation Training Services provided by the Group to Sinopec Group, the Group provides training courses twice a week at Sinopec North China Safety Operation Center and Sinopec South China Safety Operation Center for 8,000 candidates from Sinopec Group. On the basis that the training fees for each candidate amounts to RMB1,000, which is not less than the fees charged by the Group to other Independent Third Parties for similar training services, Sinopec Group shall pay approximately RMB8 million to the Group for such services each year.

Accordingly, the annual caps for the general services the Group provides to Sinopec Group in 2022, 2023 and 2024 are estimated to be approximately RMB9 million, RMB9 million and RMB9 million, respectively.

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2. Provision of General Services by Sinopec Group to the Group

(a) Principal Terms

Signing Date and Term

The Group entered into the General Services Framework Agreement with Sinopec Group. The term of the General Services Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024. Relevant subsidiaries or associated companies of both parties will enter into separate contracts that will set out the specific terms and conditions according to the principles provided in the General Services Framework Agreement.

Service Scope

Pursuant to the General Services Framework Agreement, Sinopec Group and/or its associates will provide the Group with training, office and logistics services as well as shared services in finance, human resources and information technology areas.

Pricing Policy

In respect to the principles in relation to the pricing of the relevant products and services, please refer to the sub-section headed “– 1. Provision of General Services by the Group to Sinopec Group – (a) Principal Terms – Pricing Policy” of this announcement.

The general services provided by Sinopec Group to the Group mainly include: (1) the training services provided by Sinopec Group to the Group; (2) the office and logistics services provided by Sinopec Group to the Group; and (3) the big-data analysis, consulting and other professional support services provided by Sinopec Group to the Group (including shared services in finance, human resources and information technology areas).

For the general services provided by Sinopec Group to the Group, the price is determined mainly by reference to the market price. For the determination of the aforementioned pricing of general services, please refer to the sub-section headed “– (e) Basis of Caps” of this announcement.

Termination

Please refer to the sub-section headed “– 1. Provision of General Services by the Group to Sinopec Group – (a) Principal Terms – Termination” of this announcement.

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(b) Commercial Rationale and Benefits of the Transactions

The Group has been receiving training services from Sinopec Group since its foundation, and such trainings mainly include foreign language and culture courses, overseas projects management courses and professional and management skills seminars. The trainings are expected to improve the professional skills of the Group’s employees and be beneficial to the Group’s business expansions. In addition, the Group also receives big-data analysis, consulting and other shared services in finance, human resources and information technology areas from Sinopec Group, and this is expected to further optimize the delicacy management and improve the operation efficiency of the Group.

(c) Historical Amounts

The revenue generated from the provision of general services by Sinopec Group and/or its associates to the Group for the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021 were approximately RMB48.45 million, RMB34.75 million and RMB30.14 million, respectively.

(d) Existing and Proposed Annual Caps

Existing Annual Caps

The existing annual caps for each of the years ending 31 December 2019, 2020 and 2021 are set out below:

2021 are set out below:
	For	the years ending
		31 December
	2019	2020	2021
		(RMB’000)
Total Fees	80,000	80,000	80,000
Proposed Annual Caps

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 are set out below:

and 2024 are set out below:
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Total Fees	80,000	80,000	80,000

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(e) Basis of Caps

In determination of the above annual caps for each of the years ending 31 December 2022, 2023 and 2024, the Company has considered the following:

• (1) for the training services provided by Sinopec Group to the Group, the Company mainly takes into account the historical amounts and the expected increasing demand in determining the annual caps. In specific, in 2019 a total number of 1,821 employees of the Group received the trainings provided by Sinopec Group, and the total training fees amounted to approximately RMB1.953 million while the average training fees per employee amounted to RMB1,072. In 2020, a total number of 1,823 employees of the Group received the trainings provided by Sinopec Group, and the total training fees amounted to approximately RMB1.217 million while the average training fees per employee amounted to RMB667. On basis of the above historical amounts and the expected increasing demand of the Group in the coming three years, assuming that a total number of 3,000 employees shall receive the trainings from Sinopec Group and the average training fees per employee amount to RMB1,300, the annual caps for such training fees in 2022, 2023 and 2024 are estimated to be approximately RMB4 million, RMB4 million and RMB4 million, respectively;

• (2) for the office and logistics services provided by Sinopec Group to the Group, the Company mainly takes into account the historical amounts and the expected increasing demand in determining the annual caps. In 2019, 2020 and 2021, the total fees for such services amounted to nil, nil and approximately RMB23 million, respectively. On the basis of the estimated growth of the business scale of our Group and our demand for the office and Logistics Services in the next three years, taking into account the increase in the number of employees, services fees and the services frequencies, the annual caps for such services fees in 2022, 2023 and 2024 are estimated to be approximately RMB23 million, RMB23 million and RMB23 million, respectively; and

• (3) For the financial sharing, human resources sharing and information technology sharing services provided by Sinopec Group to the Group, the Company mainly took into account the historical transaction amount and the expected increasing demand in determining the annual caps. Specifically, in 2019, the Group paid financial sharing fees of RMB32.32 million, human resources sharing fees of RMB0.43 million and information technology sharing fees of RMB0.94 million to Sinopec, respectively; in 2020, the Group paid financial sharing fees of RMB31.50 million, human resources sharing fees of RMB4.56 million and information technology sharing fees of RMB1.47 million to Sinopec, respectively; in 2021, the Group paid financial sharing fees of RMB32.50 million, human resources sharing fees of RMB5.03 million and information technology sharing fees of RMB1.45 million to Sinopec, respectively. With reference to the said historical transaction information and considering the need of business development in the future, the annual caps for such services fees in 2022, 2023 and 2024 are estimated to be approximately RMB50 million, RMB50 million and RMB50 million, respectively.

Accordingly, the annual caps for the general services Sinopec Group provides to the Group in 2022, 2023 and 2024 are estimated to be approximately RMB80 million, RMB80 million and RMB80 million, respectively.

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3. Implications under the Hong Kong Listing Rules

Sinopec Group holds more than 10% of the Company’s issued share capital and is therefore a substantial shareholder of the Company. Under Rules 14A.07(1) and 14A.07(4) of the Hong Kong Listing Rules, Sinopec Group and its associates are connected persons of the Company. Accordingly, the transactions under the General Services Framework Agreement between the Group and Sinopec Group and/or its associates constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

The transactions under the General Services Framework Agreement are entered into during the ordinary course of business on normal commercial terms where, as the Directors currently expect, each of the applicable “percentage ratios” (except for the profit ratio) calculated for the purpose of Chapter 14A of the Hong Kong Listing Rules will not exceed 5% on an annual basis. Under Rule 14A.76(2) of the Hong Kong Listing Rules, the transactions under the General Services Framework Agreement will be subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules but will be exempted from Independent Shareholders’ approval under Chapter 14A of the Hong Kong Listing Rules.

III. TECHNOLOGY R&D FRAMEWORK AGREEMENT

1. Provision of Technology R&D Services by the Group to Sinopec Group

(a) Principal Terms

Signing Date and Term

The Company entered into a technology R&D framework agreement with Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021 (collectively, the “ Technology R&D Framework Agreement ”). Pursuant to the supplemental agreement dated 20 August 2021, the term of the Technology R&D Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024. Relevant subsidiaries or associated companies of both parties will enter into separate contracts which will set out the specific terms and conditions according to the principles provided in the Technology R&D Framework Agreement.

Service Scope

Pursuant to the Technology R&D Framework Agreement, the Group will provide technology development; technology consulting; technology services; technology licensing; application for, maintenance, licensing and transfer of patents, and other technology research and development services (the “ Technology R&D Services ”) to Sinopec Group and/or its associates.

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Pricing Policy

The pricing of the relevant products and services provided under the Technology R&D Framework Agreement shall be determined in accordance with the following principles in ascending order:

• (1) government-prescribed price and government-guided price: if at any time, the government-prescribed price is applicable to any particular product or service, such product or service shall be supplied at the applicable governmentprescribed price. Where a government-guided fee standard is available, the price will be agreed within the range of the government-guided price;

• (2) market price: the price of the same or similar products, technology or services provided by an Independent Third Party during the ordinary course of business on normal commercial terms; and

• (3) agreed price: to be determined by adding a reasonable profit over a reasonable cost.

Historically, there was no government-prescribed price or government-guided fee standard that was applicable to the Technology R&D Services provided by the Group to Sinopec Group and the Technology R&D Services provided by Sinopec Group to the Group. If, during the term of the Technology R&D Framework Agreement, there is any mandatory government-prescribed price or governmentguided fee standard specifically applicable to the Technology R&D Services to be provided by the Group to Sinopec Group or the Technology R&D Services to be provided by Sinopec Group to the Group, relevant parties to the agreement shall be obliged to use the applicable government-prescribed price or agree on the price of such services within the range of the government-guided fee standard (as appropriate).

For the Technology R&D Services provided by the Group to Sinopec Group, the price is determined mainly by reference to the agreed price. Such services were specially tailored upon the requirements of relevant members of Sinopec Group previously. Therefore, there is no comparable service with a determined market price. If, during the term of the Technology R&D Framework Agreement, Sinopec Group continues to require the Group to provide tailored services, such services shall not have an applicable market price.

For the Technology R&D Services provided by Sinopec Group to the Group, the price is determined mainly by reference to the agreed price.

Termination

Before the termination of the Technology R&D Framework Agreement, the parties may, according to the Hong Kong Listing Rules, negotiate and enter into a new framework agreement or extend or renew such framework agreement to ensure the normal running of the production operations of the relevant parties after expiration of the term of the Technology R&D Framework Agreement.

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(b) Commercial Rationale and Benefits of the Transactions

As a leading energy engineering company in the PRC, the Group has made remarkable engineering achievements and has rich engineering experience, with strong capability in engineering application and engineering amplification of oil refining, petrochemicals, coal chemicals and LNG technologies. In addition, the Group poses a good understanding of the diversified demands from clients in the industries. Thus, the Group is capable of providing high-quality Technology R&D Services to its clients. Sinopec Group and/or its associates (as clients) will receive Technology R&D Services provided by the Group from time to time.

(c) Historical Amounts

The revenue generated from the provision of the Technology R&D Services by the Group to Sinopec Group and/or its associates for the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021 were approximately RMB192.54 million, RMB194.15 million and RMB63.34 million, respectively.

(d) Existing and Proposed annual caps

Existing Annual Caps

The existing annual caps for each of the years ending 31 December 2019, 2020 and 2021 are set out below:

2021 are set out below:
	For	the years ending
		31 December
	2019	2020	2021
		(RMB’000)
Total Fees	200,000	200,000	200,000
Proposed Annual Caps

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 are set out below:

and 2024 are set out below:
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Total Fees	250,000	250,000	250,000

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(e) Basis of Caps

In determining the above annual caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, the Company has considered the following: (i) the number of projects in relation to the Technology R&D Services provided by the Group to Sinopec Group and the actual transaction amount; (ii) the expected technology research and development projects that the Group will undertake every year for Sinopec Group and/or its associates; and (iii) the expected workload of new research and development projects and technology services to be provided by the Group in the coming three years. According to the technology development plan for next three years, the Group is expected to undertake over 200 technology R&D projects for Sinopec Group and/or its associates on average every year, with the expected average contract amount of each project and the historical average price of a similar project ranging from RMB1 million to RMB1.2 million. Accordingly, the annual caps for the general services Sinopec Group provide to the Group in 2022, 2023 and 2024 are estimated to be approximately RMB250 million, RMB250 million and RMB250 million, respectively.

2. Provision of Technology R&D Services by Sinopec Group to the Group

(a) Principal Terms

Signing Date and Term

We entered into the Technology R&D Framework Agreement with Sinopec Group. The term of the Technology R&D Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024. Relevant subsidiaries or associated companies of both parties will enter into separate contracts which will set out the specific terms and conditions according to the principles provided in the Technology R&D Framework Agreement.

Service Scope

Pursuant to the Technology R&D Framework Agreement, Sinopec Group and/or its associates will provide Technology R&D Services to the Group.

Pricing Policy and Termination

Please refer to the sub-section headed “– 1. Provision of Technology R&D Services by the Group to Sinopec Group – (a) Principal Terms” of this announcement.

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(b) Commercial Rationale and Benefits of the Transactions

The Group primarily focuses on engineering application and engineering amplification of oil refining, petrochemicals, coal chemicals, LNG and other technologies, whilst Sinopec Group primarily focuses on research in oil refining, petrochemical, coal chemicals and other technologies and analysis in laboratory parameters of such technologies. As part of its strengths and strategies, the Group has established close cooperative relationships with some of its clients (including Sinopec Group and/or its associates) to jointly develop new technologies and methods to facilitate the application of such technologies. These technologies will sometimes be licensed by the Group (with the permission of such clients) to its clients in the oil refining and chemical industries. In connection with those technologies and methods which the Group has developed with Sinopec Group and/ or its associates, certain portions of the total license fees which the Group receive from its clients will be paid by the Group to the relevant research and development institutions under Sinopec Group as fees for Technology R&D Services received from Sinopec Group and/or its associates.

(c) Historical Amounts

The Group did not incur any expenses for the purchase of Technology R&D Services from Sinopec Group and/or its associates for the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021.

(d) Existing and Proposed annual caps

Existing Annual Caps

The existing annual caps for each of the years ending 31 December 2019, 2020 and 2021 are set out below:

	For	the years ending
		31 December
	2019	2020	2021
		(RMB’000)
Total Fees	10,000	10,000	10,000
Proposed Annual Caps

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 are set out below:

and 2024 are set out below:
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Total Fees	10,000	10,000	10,000

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(e) Basis of Caps

In determination of the above annual caps for each of the years ending 31 December 2022, 2023 and 2024, the Company has considered the change in the way of cooperation with Sinopec Group in respect of R&D. With the Group’s increase in R&D investments, the Group may commission Sinopec to complete certain specific technology R&D. Both parties will adopt a market-oriented approach when determining the price and carry out relevant transactions. The parties will also share the equity interests in the transactions.

3. Implications under the Hong Kong Listing Rules

Sinopec Group holds more than 10% of the Company’s issued share capital and is therefore a substantial shareholder of the Company. Under Rules 14A.07(1) and 14A.07(4) of the Hong Kong Listing Rules, Sinopec Group and its associates are connected persons of the Company. Accordingly, the transactions under the Technology R&D Framework Agreement between the Group and Sinopec Group and/or its associates constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

The transactions under the Technology R&D Framework Agreement are entered into during the ordinary course of business on normal commercial terms where, as the Directors currently expect, each of the applicable “percentage ratios” (except for the profit ratio) calculated for the purpose of Chapter 14A of the Hong Kong Listing Rules will not exceed 5% on an annual basis. Under Rule 14A.76(2) of the Hong Kong Listing Rules, the transactions under the Technology R&D Framework Agreement will be subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules but will be exempted from independent shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

• IV. LAND USE RIGHTS AND PROPERTIES LEASING FRAMEWORK AGREEMENT

1. Provision of Land Use Rights and Properties Leasing Services by the Group to Sinopec Group

(a) Principal Terms

Signing Date and Term

The Company entered into a land use rights and properties leasing framework agreement with Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021 (collectively, the “ Land Use Rights and Properties Leasing Framework Agreement ”). Pursuant to the supplemental agreement dated 20 August 2021, the term of the Land Use Rights and Properties Leasing Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024. Relevant subsidiaries or associated companies of both parties will enter into separate contracts which will set out the specific terms and conditions according to the principles provided in the Land Use Rights and Properties Leasing Framework Agreement.

— 16 —

Service Scope

Pursuant to the Land Use Rights and Properties Leasing Framework Agreement, the Group will provide land and properties for production, storage and sales purpose, and other land use rights and properties leasing services to Sinopec Group and/or its associates.

Pricing Policy

The pricing of the relevant products and services provided under the Land Use Rights and Properties Leasing Framework Agreement shall be determined in accordance with the following principles in ascending order:

• (1) government-prescribed price and government-guided price: if at any time, the government-prescribed price is applicable to any particular product or service, such product or service shall be supplied at the applicable governmentprescribed price. Where a government-guided fee standard is available, the price will be agreed within the range of the government-guided price;

• (2) market price: the price of the same or similar products, technology or services provided by an Independent Third Party during the ordinary course of business on normal commercial terms; and

• (3) agreed price: to be determined by adding a reasonable profit over a reasonable cost.

Historically, there was no government-prescribed price or government-guided fee standard that was applicable to the land use rights and properties leasing services provided by the Group to Sinopec Group and the land use rights and properties leasing services provided by Sinopec Group to the Group. If, during the term of the Land Use Rights and Properties Leasing Framework Agreement, there is any mandatory government-prescribed price or government-guided fee standard specifically applicable to the land use rights and properties leasing services to be provided by the Group to Sinopec Group or the land use rights and properties leasing services to be provided by Sinopec Group to the Group, relevant parties to the agreement shall be obliged to use the applicable government-prescribed price or agree on the price of such nature the range of the government-guided fee standard (as appropriate).

For the land use rights and properties leasing services provided by Sinopec Group to the Group, the price is determined mainly by reference to the market leasing price for the nearby land and properties taking into amount their areas, locations and nature.

Termination

Before the termination of the Land Use Rights and Properties Leasing Framework Agreement, the parties may, according to the Hong Kong Listing Rules, negotiate and enter into a new framework agreement or extend or renew such framework agreement to ensure the normal running of the production operations of the relevant parties after expiration of the term of the Land Use Rights and Properties Leasing Framework Agreement.

— 17 —

(b) Commercial Rationale and Benefits of the Transactions

To promote the Company’s business development, the Group often rents its land or houses near the location of its cooperation projects with Sinopec Group for production, storage, office and employee dormitory purposes. The land or houses leased by the Group from Sinopec Group are close to the Company’s projects, and the relevant rental costs are lower or not higher than the market rent in the areas adjacent to the land and houses, which helps the Company reduce management costs, optimizes business and financial performance and are in the interests of the Group and the Shareholders.

(c) Historical Amounts

The revenue generated from the provision of the land use rights and properties leasing services by the Group to Sinopec Group and/or its associates for the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021 were approximately RMB6.54 million, RMB8.74 million and RMB4.77 million, respectively.

(d) Existing and Proposed annual caps

Existing Annual Caps

The existing annual caps for each of the years ended 31 December 2019 and 2020 and the year ending 31 December 2021 are set out below:

	For the years ending 31	For the years ending 31	December
	2019	2020	2021
		(RMB’000)
Total Leasing Fees	9,000	9,000	9,000
Proposed Annual Caps

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 are set out below:

and 2024 are set out below:
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Total Leasing Fees	35,000	35,000	35,000

(e) Basis of Caps

In determining the above Annual Caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, the Company has considered the following: (i) the expected price of the agreement in the following three years; (ii) the expected rise of the leasing prices of the land and properties in nearby areas. Accordingly, the annual caps for the general services the Group provide to Sinopec Group in 2022, 2023 and 2024 are estimated to be approximately RMB35 million, RMB35 million and RMB35 million, respectively.

— 18 —

2. Provision of Land Use Rights and Properties Leasing Services by Sinopec Group to the Group

(a) Principal Terms

Signing Date and Term

We entered into the Land Use Rights and Properties Leasing Framework Agreement with Sinopec Group. The term of the Land Use Rights and Properties Leasing Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024. Relevant subsidiaries or associated companies of both parties will enter into separate contracts which will set out the specific terms and conditions according to the principles provided in the Land Use Rights and Properties Leasing Framework Agreement.

Service Scope

Pursuant to the Land Use Rights and Properties Leasing Framework Agreement, Sinopec Group and/or its associates will provide land and properties for production and office purpose, and other land use rights and properties leasing services to the Group.

Pricing Policy and Termination

Please refer to the section headed “– 1. Provision of Land Use Rights and Properties Leasing Services by the Group to Sinopec Group – (a) Principal Terms” of this announcement.

(b) Commercial Rationale and Benefits of the Transactions

To promote its daily business development, Sinopec Group often rents its land or houses near the location of its cooperation projects with the Group for its production, storage, office and employee dormitory purposes. The land or houses leased by Sinopec Group from the Group are close to the location of the projects, and the relevant rental costs are not lower than the general market rent in the areas adjacent to the land and houses, which at the same time helps expand the business cooperation between the Group and Sinopec Group and is in the interests of the Group and the Shareholders.

(c) Historical Amounts

The leasing fees paid to Sinopec Group and/or its associates from the Group for the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021 were approximately RMB4.94 million, RMB3.50 million and RMB3.57 million, respectively.

— 19 —

(d) Existing and Proposed annual caps

Existing Annual Caps

The existing annual caps for each of the years ended 31 December 2019 and 2020 and the year ending 31 December 2021 are set out below:

	For the years ending 31	For the years ending 31	December
	2019	2020	2021
		(RMB’000)
Total Leasing Fees	8,000	8,000	8,000
Proposed Annual Caps

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 are set out below:

and 2024 are set out below:
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Total Leasing Fees	25,000	25,000	25,000

(e) Basis of Caps

In determining the above Annual Caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, the Company has considered the following: (i) the expected price of the agreement in the following three years; (ii) the expected rise of the leasing prices of the land and properties in nearby areas. Accordingly, the annual caps for the general services Sinopec Group provide to the Group in 2022, 2023 and 2024 are estimated to be approximately RMB25 million, RMB25 million and RMB25 million, respectively.

3. Implications under the Hong Kong Listing Rules

Sinopec Group holds more than 10% of the Company’s issued share capital and is therefore a substantial shareholder of the Company. Under Rules 14A.07(1) and 14A.07(4) of the Hong Kong Listing Rules, Sinopec Group and its associates are connected persons of the Company. Accordingly, the transactions under the Land Use Rights and Properties Leasing Framework Agreement between the Group and Sinopec Group and/or its associates constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

The transactions under the Land Use Rights and Properties Leasing Framework Agreement are entered into during the ordinary course of business on normal commercial terms where, as the Directors currently expect, each of the applicable “percentage ratios” (except for the profit ratio) calculated for the purpose of Chapter 14A of the Hong Kong Listing Rules will not exceed 5% on an annual basis. Under Rule 14A.76(2) of the Hong Kong Listing Rules, the transactions under the Land Use Rights and Properties Leasing Framework Agreement will be subject to the reporting, announcement and annual review requirements under Chapter 14A of the Hong Kong Listing Rules but will be exempted from independent shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

— 20 —

V. FINANCIAL SERVICES FRAMEWORK AGREEMENT

1. Principal Terms

(a) Signing Date and Term

The Company entered into a financial services framework agreement with Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 22 April 2013, 28 August 2015, 21 August 2018 and 20 August 2021 (collectively, the “ Financial Services Framework Agreement ”). Pursuant to the supplemental agreement dated 20 August 2021, the term of the Financial Services Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024, subject to Independent Shareholders’ approval at the EGM.

(b) Scope of Services

Pursuant to the Financial Services Framework Agreement, Sinopec Finance and Sinopec Century Bright will provide financial services to the Group, such financial services primarily include deposits, loans, entrustment loans, settlement services, entrustment investments, financial and financing consulting, credit certification, insurance agency, exchange settlement, bond underwriting, foreign exchange business, and related consultancy and agency financial services. The Group enters into separate contracts with Sinopec Finance and Sinopec Century Bright, which set out the specific terms and conditions according to the principles provided in the Financial Services Framework Agreement.

(c) Pricing Policy

The pricing of the services provided under the Financial Services Framework Agreement shall be determined in accordance with the following principles in ascending order:

• (i) government prescribed price and government guided price: if at any time, the government-prescribed price is applicable to any particular financial service; such service shall be supplied at the applicable government-prescribed price. Where a government-guided fee standard is available, the price will be agreed within the range of the government-guided price;

• (ii) market price: the price of the same or similar services provided by an Independent Third Party during the ordinary course of business on normal commercial terms; and

• (iii) agreed price: to be determined by adding a reasonable profit over a reasonable cost.

— 21 —

Generally, the pricing of the services provided under the Financial Services Framework Agreement is mainly determined by reference to (i) the governmentprescribed price and government-guided price; and (ii) the market price. In the unlikely event that the agreed price has to be used, with a view to arriving at a reasonable profit, such price will be determined through arm’s length negotiations between the relevant parties after taking into account the prevailing market and business conditions.

In particular, the Financial Services Framework Agreement provides that the services shall be provided in accordance with the following pricing principles:

• (i) Deposits services: the interest rate applicable to the Group’s deposits with the Sinopec Finance Companies will not be lower than: (x) the minimum interest rate published by the PBOC for deposits of a similar type for the same period (applicable to deposits with Sinopec Finance only); (y) the interest rate for deposits of a similar type for the same period placed by other members of Sinopec Group; and (z) the interest rate for deposits of a similar type for the same period offered by independent commercial banks to the Group;

• (ii) Entrustment loan services: the interest rates applicable to the Group’s entrustment loans to Sinopec Group through Sinopec Finance shall be (x) on normal commercial terms; (y) no less favorable than interest rates or comparable entrustment loans provided by other members of Sinopec Group to Sinopec Group through Sinopec Finance; and (z) generally not lower than the interest rates for bonds or loans available in the PRC market issued/provided by companies or financial institutions of credit ratings and risk profile similar to those of Sinopec Group or Sinopec Corp.; and

• (iii) Settlement and other financial services: the service fees for settlement, entrustment loans and other financial services charged by Sinopec Finance shall not be higher than (x) fees charged by independent commercial banks or financial institutions; and (y) fees charged to other members of Sinopec Group for similar services.

(d) Termination

Before the termination of the Financial Services Framework Agreement, the parties may, according to the Hong Kong Listing Rules, negotiate and enter into a new framework agreement or extend or renew the Financial Services Framework Agreement to ensure the normal operations of the relevant parties after expiration of the term of the Financial Services Framework Agreement.

— 22 —

2. Commercial Rationale and Benefits of the Deposits and Entrustment Loans

• (a) Deposits

• (i) Centralized cash management. It is the Group’s policy to centralize its cash management function. As the terms offered by the Sinopec Finance Companies are no less favorable than the deposit interest rates published by the PBOC or independent commercial banks in Hong Kong for deposits of a similar type for the same period, the terms of placing deposits with the Sinopec Finance Companies are no less favorable to the Group than placing deposits with independent commercial banks. In addition, the centralized deposit of funds with the Sinopec Finance Companies will enable the Group to use the Sinopec Finance Companies as a primary clearing and settlement platform, provide the Group with access to a centralized cash pool (both onshore and offshore), giving the Group the flexibility to make timely withdrawals from time to time to meet its funding needs and reduce the need for the Group to obtain third party financing, which will in turn help it achieve a lower cost of funding and maximize cost and operational efficiencies.

• (ii) Clearing and settlement platform. In the Group’s ordinary course of business, as Sinopec Group is the Group’s single largest client, the Group transacts with numerous subsidiaries/affiliated companies of Sinopec Group. In line with Sinopec Group’s internal group policy, such subsidiaries/affiliated companies generally maintain settlement accounts with the Sinopec Finance Companies. The centralized maintenance of deposits by the Group with the Sinopec Finance Companies will facilitate clearing with other members of Sinopec Group (some of whom are the Group’s clients), reduce the time required for remittance and receipt of funds and is generally more administratively efficient than settlement through independent banks. It would not be efficient for Sinopec Group (and its affiliates) and the Group to separately maintain bank accounts with independent banks for clearing and settlement.

• (iii) Familiarity with the Group’s business. As the Sinopec Finance Companies only provide financial services to members of Sinopec Group and its subsidiaries, they have over the years acquired extensive knowledge of the Group’s industry. In the context of the Group, the Sinopec Finance Companies are familiar with the Group’s capital structure, business operations, funding needs and cash flow pattern, which enables them to better anticipate the Group’s business needs. As a result, the Sinopec Finance Companies are more well positioned to provide and serve the Group with bespoke and cost efficient services that would not be easy for independent commercial banks to replicate.

• (iv) Flexibility to the Group. The Group has the sole discretion to deposit and withdraw its deposits with the Sinopec Finance Companies from time to time. There is no restriction on the Group’s ability to deposit its cash with independent commercial banks in or outside the PRC now or in the future should the Group so wish. Currently, the Group maintains deposits with independent commercial banks in and outside the PRC and expects to continue to do so depending on the Group’s contractual and other requirements. The Group chooses to deposit its cash with the Sinopec Finance Companies as this helps the Group centralize the treasury management function.

— 23 —

(b) Entrustment loans

• (i) Favorable short term fund investment options. Due to the nature of the Group’s business, the Group receives significant amounts of prepayments from clients from time to time, which may not be immediately required for its operational needs. Such prepayments are in effect advance payments from the Group’s clients, which the Group will apply towards performance of the underlying contracts as appropriate (such as purchase of raw materials and equipment, and payment of the Group’s sub-contractors) and are only temporarily idle. Therefore, the Group needs to invest such surplus cash prudently as it is an advance/deposit from the Group’s clients. Given the Group’s need to match funds within a relatively short time whilst maintaining flexibility to pay the Group’s trade payables from time to time, there is a lack of comparable alternative fund allocation options. From the Group’s perspective, the provision of entrustment loans to Sinopec Group is a safe, cost efficient and flexible option for investing such cash surplus, which may not otherwise be available in the open market.

• (ii) Credit rating of Sinopec Group. Sinopec Group is the borrower of the entrustment loans. Pursuant to the terms of the entrustment loans, Sinopec Group has the sole obligation to repay principal and interest (and any late payment interest). In 2020, Sinopec Group obtained an A+ long-term corporate credit rating from Standard & Poor with a stable outlook and an A1 longterm corporate credit rating from Moody’s with a stable outlook. As at the date of this announcement, Sinopec Group had a registered capital of RMB326.5 billion. Sinopec Group ranked second in 2020 in Fortune Global 500. The Group therefore considers that lending to Sinopec Group is a low risk fund allocation option. During the two years ended 31 December 2019 and 2020 and the six months ended 30 June 2021, Sinopec Group has not defaulted under any of the entrustment loans provided by the Group. Taking into account the creditworthiness of Sinopec Group and clean repayment history, the entrustment loans provided by the Group are generally unsecured. The Group considers that providing entrustment loans to Sinopec Group is a comprehensive, low risk fund allocation option due to the top-tier credit rating of Sinopec Group and clean repayment history, generating a higher return for the Group than deposits which would have been the only other fund allocation option for the Group given the investment policy with respect to such funds.

— 24 —

• (iii) Efficient and flexible cash management. Provision of entrustment loans to Sinopec Group will allow the Group to allocate its surplus cash efficiently within a relatively short timeframe. The Group’s entrustment loans to Sinopec Group generally do not exceed one year (the majority are for a period of one year or six months), enabling the Group to deploy its financial resources efficiently and flexibly. Upon the expiry of the entrustment loans, the Group will receive the principal amount and the interest payment in relation to such entrustment loans from Sinopec Finance Companies. Any new entrustment loans to Sinopec Group will be subject to normal approval procedures in a standardized way. Furthermore, whilst the Group has historically provided entrustment loans to Sinopec Group and expects to continue to do so in the future, the Group is not under any legal or other obligation to provide entrustment loans to Sinopec Group. Pursuant to the entrustment loan agreements, the Group is entitled to early terminate the loans (without penalty) at its option in which case current deposit interest rate will apply.

• (iv) Normal commercial terms. The Group understands that there is no market standard rate for entrustment loans as the interest rate is determined through arm’s length negotiations between the parties based on, among other things, relative bargaining power, risk profile and security value. The Group generally uses the prevailing base deposit rate published by the PBOC as a reference point with an upward adjustment taking into account the amount and term of the loan. In addition, the Group will refer to the list of interest rates that specifies the range of interest rates for different entrustment loan amounts and terms. Such list has been agreed by Sinopec Group and the Company after arm’s length negotiations and will be reviewed and re-negotiated by the parties periodically. Based on such list, the Group’s Chief Financial Officer and finance department will decide the interest rates of the entrustment loan agreements to be entered into between Sinopec Group and the Group. The Group will also make reference to other comparable rates, such as the interest rates for bonds or loans available in the PRC market issued/provided by companies or financial institutions of credit ratings and risk profile similar to those of Sinopec Group or Sinopec Corp., obtained through various channels such as banks and the relevant issuers (if any) for the purpose of ensuring that the interest rates for the entrustment loans are in the interests of the Company and the Shareholders as a whole. The interest rates on entrustment loans are generally not lower than the interest rates on bonds of similar terms issued by Sinopec Group and Sinopec Corp. The interest rates on entrustment loans provided by the Group to Sinopec Group are generally higher than the yield on principal-guaranteed wealth management products available in the PRC market.

— 25 —

In addition, the Board has considered the risks in association with the use of the services provided by Sinopec Finance and Sinopec Century Bright under the Financial Services Framework Agreement instead of the same services provided by independent commercial banks. Such risks mainly include (i) the risks commonly faced by the banking industry; and (ii) possible material adverse change in the financial conditions of Sinopec Finance and Sinopec Century Bright. However, taking into account (i) that the interest rates on the Group’s entrustment loans are generally higher than yield on principal-guaranteed investment products available in the open market; (ii) Sinopec Group’s strong credit rating and clean repayment history; (iii) the potential significant drain on the Group’s time and resources to seek alternative borrowers and a lack of comparable alternative fund allocation options compatible with the Group’s needs; and (iv) that the Group can early terminate its entrustment loans at its option (in which case the current deposit interest rate will apply), the Company and the Directors consider that the continuing connected transactions contemplated under the Financial Services Framework Agreement are in the interests of the Company and the Shareholders as a whole.

(c) Internal control and corporate governance measures

Although there is no limit on the percentage of the Group’s total liquid and/ or surplus funds to be deposited with the Sinopec Finance Companies or loaned to Sinopec Group, the Company considers that for the reasons explained above, such policy is in the interests of the Company and the Shareholders as a whole. In addition, the Board has considered the risks (such as the possible material adverse change in the financial conditions of the Sinopec Finance Companies) in association with the use of the services provided by Sinopec Finance and Sinopec Century Bright under the Financial Services Framework Agreement instead of the same services provided by independent commercial banks. The Group has further adopted (i) an independent financial system; (ii) risk management measures; (iii) internal control measures; and (iv) corporate governance measures (including the pricing mechanism) with respect to the transactions under the Financial Services Framework Agreement in order to further safeguard the interests of the Independent Shareholders. The relevant measures include, but are not limited to, the following:

• The Sinopec Finance Companies and Sinopec Group provide sufficient information including various financial indicators (as well as annual and interim financial statements) at the end of every quarter to enable the Group to monitor and review the financial condition of the Sinopec Finance Companies and Sinopec Group.

• The Group requests, from time to time at its sole discretion, for the deposits with the Sinopec Finance Companies and the entrustment loans through Sinopec Finance to Sinopec Group to be withdrawn or early terminated (either in full or in part) to assess and ensure the liquidity and safety of its deposits and entrustment loans.

• Sinopec Group has undertaken, unconditionally and irrevocably, that it shall provide capital injection to Sinopec Finance in case of any payment difficulties arising from its operations. Such undertaking provides indemnification for the Group’s deposits with Sinopec Finance under the Financial Services Framework Agreement.

— 26 —

• The Group has adopted a cash management policy (《資金管理辦法》) and an internal bank management policy (《內部銀行管理辦法》). Such policies provide that the Group’s cash should be centrally managed in order to maximize the benefits of a cash pool. The Company’s finance department is responsible for administering the cash management policy and internal bank management policy. When providing entrustment loans to connected persons (whether through Sinopec Finance or otherwise), the Group will consider the interest rate, service fees, term and use of loan and creditworthiness of the ultimate borrower based on principles of maximum return, cost control and risk control. The entrustment loan agreements (setting out interest rate, service fees, term and use of loan) are first approved by the Company’s finance department, then the Company’s Chief Financial Officer and ultimately by the Chairman of the Board or the Authorized Representatives.

• The Company’s management prepares risk assessment reports of the funds deposited with the Sinopec Finance Companies and entrustment loans to Sinopec Group every quarter which will be submitted to the Board for consideration.

• The independent non-executive Directors independently scrutinizes the implementation and enforcement of the transactions (including the pricing mechanism) under the Financial Services Framework Agreement. Only independent non-executive Directors may vote in respect of matters under the Financial Services Framework Agreement.

• Before entering into any transactions under the Financial Services Framework Agreement with the Sinopec Finance Companies, the Company will obtain at least three quotes from independent financial institutions for similar services of the same term. The Company will compare such quotes with those offered by the Sinopec Finance Companies, and decide whether to accept the offer from the Sinopec Finance Companies.

• In the event that there is any change in the fees or interest rates for the services provided by the Sinopec Finance Companies to the Group under the Financial Services Framework Agreement, the Sinopec Finance Companies are required to notify the Company of (i) such change in the fees or interest rates; and (ii) the pricing information for the similar services provided by the Sinopec Finance Companies to other members of Sinopec Group. The relevant internal audit personnel of the Company will then check the aforementioned information to ensure that such revised fees or interests rates are not less favorable than the fees or interests rates offered by the Sinopec Finance Companies to the other members of Sinopec Group for similar services.

For further details of the Group’s internal control and corporate governance measures, please refer to the section headed “Connected Transactions” in the Prospectus.

— 27 —

3. Historical Amounts

Set out below (i) the fees in relation to settlement and other financial services paid to the Sinopec Finance Companies; (ii) the maximum daily balance of deposits and interest income arising from such deposits with the Sinopec Finance Companies; and (iii) the maximum daily balance of entrustment loans arranged through Sinopec Finance for each of the years ended 31 December 2019 and 2020 and the six months ended 30 June 2021:

months ended 30 June 2021:
			For the
			six months
	For the years ended		ended
	31 December		30 June
	2019	2020	2021
		(RMB’000)
Service fees in relation to settlement
and other financial services	1,730	1,820	920
Maximum daily balance of deposits
and interest income	7,387,000	7,873,000	8,283,000
Maximum daily balance of
entrustment loans	19,000,000	21,000,000	22,000,000

4. Existing and Proposed Annual Caps

(a) Existing Annual Caps

As disclosed in the Company’s announcement dated 21 August 2018, the existing annual caps for each of the years ending 31 December 2019, 2020 and 2021 are set out below:

out below:
	For	the years ending
		31 December
	2019	2020	2021
		(RMB’000)
Service fees in relation to settlement,
entrustment loans
and other financial services	3,120	3,480	3,840
Maximum daily balance of deposits
and interest income	7,500,000	9,000,000	10,000,000
Maximum daily balance of
entrustment loans	19,000,000	21,000,000	22,000,000

— 28 —

(b) Proposed Annual Caps

The total maximum annual fees for each of the years ending 31 December 2022, 2023 and 2024 shall not exceed the caps set out below:

2023 and 2024 shall not exceed the caps	set out below:	set out below:
	For the years ending 31		December
	2022	2023	2024
		(RMB’000)
Service fees in relation to settlement
and other financial services	3,500	4,000	4,000
Maximum daily balance of deposits
and interest income	8,000,000	8,000,000	8,000,000
Maximum daily balance of
entrustment loans	20,500,000	20,500,000	20,500,000

(c) Basis of the Proposed Annual Caps

In determining the above annual caps for each of the years ending 31 December 2022, 2023 and 2024, respectively, the Company has mainly considered:

• (1) the utilization rates of the above-mentioned annual caps for each of the years ended 31 December 2019, 2020 and for the six months ended 30 June 2021;

• (2) the interest rates and fee rates in connection with deposits, entrustment loans and other financial services;

• (3) in order to expand external fund raising channels and diversify our investment portfolio, the Group is planning to reduce the total amount of deposits and entrustment loans from Sinopec Finance Companies in the next three years;

• (4) the expected business volume of the Group for the years 2022, 2023 and 2024; and

• (5) the Group’s expected net cash inflow generated by its operating activities for the years 2022, 2023 and 2024.

When determining whether funds are placed as deposits with the Sinopec Finance Companies or loaned to Sinopec Group through the provision of entrustment loans, the Group will take into account the following factors based on principles of maximum return, cost control and risk control: (i) the funding plan which specifies the Group’s long term and short term funding needs, operational needs and capital expenditure requirements; (ii) the Group’s fund investment needs with reference to the interest rates offered for deposits and entrustment loans; (iii) the amount of cash inflow from business operations; and (iv) the service fees charged and terms of entrustment loans.

— 29 —

5. Implications under the Hong Kong Listing Rules

The following diagram sets out the shareholding relationship among Sinopec Group, Sinopec Finance, Sinopec Century Bright and the Company as at the date of this announcement:

==> picture [300 x 157] intentionally omitted <==

----- Start of picture text -----

Sinopec Group
70.86% 51% 67.01% [(1)] 100%
Sinopec Corp. The Company
49%
Sinopec Finance Sinopec
Century Bright
----- End of picture text -----

Note:

• (1) Sinopec Group directly or indirectly holds 2,967,200,000 Domestic Shares (including 59,344,000 Domestic Shares held by its wholly-owned subsidiary, SAMC), representing 67.01% of the total share capital of the Company.

As shown above, Sinopec Group holds more than 10% of the Company’s issued share capital and is therefore a substantial shareholder of the Company. Under Rules 14A.07(1) and 14A.07(4) of the Hong Kong Listing Rules, Sinopec Group and its associates (including Sinopec Century Bright and Sinopec Finance) are connected persons of the Company. Accordingly, the transactions under the Financial Services Framework Agreement between the Group and Sinopec Group and/or its associates constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

The transactions under the Financial Services Framework Agreement are entered into during the ordinary course of business on normal commercial terms where, as the Directors currently expect, each of the applicable percentage ratios (except for the profit ratio) calculated for the purpose of Chapter 14A of the Hong Kong Listing Rules will exceed 5% on an annual basis and the annual transaction amounts will exceed HK$10,000,000. Under Rule 14A.76(2) of the Hong Kong Listing Rules, such transactions will constitute the Company’s non-exempt continuing connected transactions, and are subject to the reporting, annual review, announcement and Shareholders’ approval requirements under Chapter 14A of the Hong Kong Listing Rules.

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Meanwhile, in terms of the proposed maximum daily balance of deposits and interest income as well as the proposed maximum daily balance of entrustment loans under the Financial Services Framework Agreement for each of the years ending 31 December 2022, 2023 and 2024, one or more of the applicable percentage ratios calculated according to Rule 14.07 of the Hong Kong Listing Rules will exceed 25%. Under Chapter 14A of the Hong Kong Listing Rules, the services of deposits and entrustment loans services under the Financial Services Framework Agreement will also constitute major transactions of the Company on an aggregated basis, and are subject to the announcement, circular and Shareholders’ approval under Chapter 14 of the Hong Kong Listing Rules.

VI. ENGINEERING AND CONSTRUCTION SERVICES FRAMEWORK AGREEMENT

1. Principle Terms

(a) Signing Date and Terms

The Company entered into an engineering and construction services framework agreement with Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021 (collectively, the “ Engineering and Construction Services Framework Agreement ”). According to the supplemental agreement dated 20 August 2021, the term of the Engineering and Construction Services Framework Agreement has been extended by both parties after arm’s length negotiations for another three years from 1 January 2022 to 31 December 2024, subject to Independent Shareholders’ approval at the EGM. Relevant subsidiaries or associated companies of both parties will enter into separate contracts that will set out the specific terms and conditions according to the principles provided in the Engineering and Construction Services Framework Agreement.

(b) Service Scope

• (i) Provision of engineering and construction services by the Group to Sinopec Group: Pursuant to the Engineering and Construction Services Framework Agreement, the Group will provide the following engineering and construction services to Sinopec Group and/or its associates: engineering consulting; project management; project supervision; contracting; engineering design; construction; testing and inspection and repair services; equipment manufacturing services; procurement services and equipment leasing; technology licensing, technology transfer and engineering technology services; labor supply service; and other engineering supporting services.

• (ii) Provision of services by Sinopec Group to the Group: Pursuant to the Engineering and Construction Services Framework Agreement, Sinopec Group and/or its associates will provide the following services in respect of the Group’s engineering and construction services business: supply of equipment and materials; procurement services and equipment leasing; technology licensing, technology transfer and engineering technology services; labor supply service; and other supporting services.

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(c) Pricing Policy

The pricing of the relevant products and services provided under the Engineering and Construction Services Framework Agreement shall be determined in accordance with the following principles in ascending order:

• (i) government prescribed price and government guided price: if at any time, the government-prescribed price is applicable to any particular product or service, such product or service shall be supplied at the applicable governmentprescribed price. Where a government-guided fee standard is available, the price will be agreed within the range of the government-guided price;

• (ii) tender and bidding price: where tender and bidding process is necessary under applicable laws, regulations and rules, the price shall be ultimately determined in accordance with the tender and bidding process;

• (iii) market price: the price of the same or similar products, technologies or services provided by an Independent Third Party during the ordinary course of business on normal commercial terms; and

• (iv) agreed price: to be determined by adding a reasonable profit over a reasonable cost.

Historically, there was no government-prescribed price or government-guided fee standard that was applicable to the engineering and construction services provided by the Group to Sinopec Group and those provided by Sinopec Group to the Group under the Engineering and Construction Services Framework Agreement. If, during the term of the Engineering and Construction Services Framework Agreement, there is any mandatory government-prescribed price or government-guided fee standard specifically applicable to the engineering and construction services to be provided by the Group to Sinopec Group or the services to be provided by Sinopec Group to the Group, relevant parties to the agreement shall be obliged to use the applicable government-prescribed price or agree on the price of such services within the range of the government-guided fee standard (as appropriate). The Company also undertakes that it will disclose the details of the policy and guidance under the government-prescribed price and government-guided fee standards when such price or fee standards become available.

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For the engineering and construction services to be provided by the Group to Sinopec Group, pricing is determined mainly by reference to the tender and bidding price. The bidding price mainly takes into account various factors including technical requirements, project execution standards, local meteorological and geographical conditions, public works conditions, estimated labor hours and costs, estimated material and equipment costs and other unforeseeable expenses. The bidding prices are generally specific to each project and the Group is not able to implement standard pricing policies for all projects. In addition, the tender and bidding process and its price are conducted in accordance with the Bidding Law of the People’s Republic of China (《中華人民共和國招投標法》) and other applicable PRC laws, regulations and rules. Meanwhile, as the tender and bidding process is an open and transparent process based on market participation, the tender and bidding price under such process reflects the applicable price available in the open market. Hence, the tender and bidding price is the market price. The agreed price is only applied for services under certain circumstances (e.g. for provision of services with exclusive technological advantages).

For the services to be provided by Sinopec Group to the Group under the Engineering and Construction Services Framework Agreement, the pricing is determined mainly by reference to the agreed price. The reason the Group did not use tender and bidding price approach is primarily that, historically, such services were not typically subject to tender and bidding processes due to the prevalence of the type and nature of such services as well as the high frequency of the procurement of such services. The Company does not anticipate the type, the nature, and the frequency of the procurement of the services to be procured from Sinopec Group by the Group during the term of the Engineering and Construction Services Framework Agreement to significantly deviate from those of the services the Group currently procures from Sinopec Group. In the event that the services to be procured from Sinopec Group by the Group are mandatorily subject to tender and bidding process, the price and the process will be conducted in accordance with the Bidding Law of the People’s Republic of China. In addition, historically, the Group did not use the market price for the procurement of such services from Sinopec Group because the agreed price and terms have generally been more competitive than the available market price and terms, which will further economize the procurement funds of the Group, increase the efficiency of the allocation of its procurement resources, as well as achieve economies of scale.

(d) Termination

Before the termination of the Engineering and Construction Services Framework Agreement, the parties may, according to the Hong Kong Listing Rules, negotiate and enter into a new framework agreement or extend or renew such framework agreement to ensure the normal running of the production operations of the relevant parties after expiration of the term of the Engineering and Construction Services Framework Agreement.

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2. Reasons for and Benefits of the Engineering and Construction Services Framework Agreement

There are specific technology and quality standard requirements implemented in the oil industry. With a leading position in the oil industry, Sinopec Group ranked second in 2020 in Fortune Global 500 and has steadily growing capital expenditure plan. Benefiting from its scale and strength, Sinopec Group can provide the Company with stable supply of equipment/materials, procurement services and technical services and other supporting products and services. Pursuant to relevant terms under the Engineering and Construction Services Framework Agreement, the Group is able to procure products and services from Sinopec Group at prices no higher than the prices offered by other independent suppliers.

Sinopec Group mainly adopts public tendering process for its engineering projects. In consideration of the Group being a leading energy chemical engineering company in the PRC and the long-term relationship maintained with Sinopec Group, it can be reasonably expected that Sinopec Group’s demand for the Group’s products and services will likely increase in tandem with its future capital expenditure plan.

3. Historical Amounts

Set out below (i) the revenue generated from the provision of engineering and construction services by the Group to Sinopec Group and/or its associates; and (ii) the expenditure incurred for the provision of services by Sinopec Group and/or its associates to the Group for each of the years ended 31 December 2019 and 2020 and the six months ended 30 June 2021:

and the six months ended 30 June 2021:
			For the
			six months
	For the years ended		ended
	31 December		30 June
	2019	2020	2021
		(RMB’000)
Revenue generated from the provision of
engineering and construction services
by the Group to Sinopec Group
and/or its associates	25,584,000	32,932,000	18,195,000
Expenditure incurred for the provision of
services by Sinopec Group and/or
its associates to the Group	2,982,000	3,472,000	2,502,000

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4. Existing and Proposed Annual Caps

(a) Existing Annual Caps

The existing annual caps for each of the years ending 31 December 2019, 2020 and 2021 are set out below:

2021 are set out below:
	For	the years ending
		31 December
	2019	2020		2021
		(RMB’000)
Revenue generated from the provision of
engineering and construction services
by the Group to Sinopec Group
and/or its associates	40,000,000	42,000,000	45,000,000
Expenditure incurred for the provision of
services by Sinopec Group and/or
its associates to the Group	3,000,000	3,500,000	4,000,000

(b) Proposed Annual Caps

The proposed annual caps for each of the years ending 31 December 2022, 2023 and 2024 shall not exceed the caps set out below:

	For	the years ending	the years ending
		31 December
	2022	2023		2024
		(RMB’000)
Revenue generated from the provision of
engineering and construction services
by the Group to Sinopec Group and/or
its associates	55,000,000	55,000,000	55,000,000
Expenditure incurred for the provision
of services by Sinopec Group and/or
its associates to the Group	7,000,000	7,000,000	7,000,000

(c) Basis of Caps

In determining the above annual caps for the Group’s provision of engineering and construction services to Sinopec Group and/or its associates for each of the years ending 31 December 2022, 2023 and 2024, the following factors have mainly been considered:

• (i) Sinopec Group’s investment plan in relation to, among other things, oil refinery, petrochemicals, new coal chemicals, and natural gas during the period from 2022 to 2024;

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• (ii) historical operating income generated from the provision of engineering and construction services by the Group to Sinopec Group and/or its associates, as well as such operating income as a percentage of the Group’s total operating income for the corresponding year;

• (iii) the total amount of backlog and new contracts value in connection with the provision of engineering and construction services by the Group to Sinopec Group, as well as such amounts as a percentage of the total amount of the Group’s backlog and new contracts value as at 30 June 2021; and

• (iv) the Group’s business development plan for the years of 2022, 2023 and 2024, and the operating income in connection with the engineering and construction services provided by the Group to Sinopec Group as a percentage of the Group’s total operating income.

In determining the above annual caps for the provision of services by Sinopec Group and/or its associates to the Group, the Company has mainly considered:

• (i) historical expenditure incurred for the provision of services by Sinopec Group and/or its associates to the Group;

• (ii) the expenditure incurred for the provision of services by Sinopec Group to the Group as a percentage of the revenue generated from the provision of engineering and construction services by the Group to Sinopec Group; and

(iii) the Group’s business development plan for the years of 2022, 2023 and 2024.

5. Implications under the Hong Kong Listing Rules

Sinopec Group holds more than 10% of the Company’s issued share capital and is therefore a substantial shareholder of the Company. Under Rules 14A.07(1) and 14A.07(4) of the Hong Kong Listing Rules, Sinopec Group and its associates are connected persons of the Company. Accordingly, the transactions under the Engineering and Construction Services Framework Agreement between the Group and Sinopec Group and/or its associates constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

The transactions under the Engineering and Construction Services Framework Agreement are entered into during the ordinary course of business on normal commercial terms where, as the Directors currently expect, each of the applicable percentage ratios (except for the profit ratio) calculated for the purpose of Chapter 14A of the Hong Kong Listing Rules will exceed 5% on an annual basis and the annual consideration will exceed HK$10,000,000. Under Rule 14A.76(2) of the Hong Kong Listing Rules, such transactions will constitute the Company’s nonexempt continuing connected transactions, and are subject to the reporting, annual review, announcement and Shareholders’ approval requirements under Chapter 14A of the Hong Kong Listing Rules.

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Meanwhile, in terms of the revenue generated from the provision of engineering and construction services by the Group to Sinopec Group and/or its associates for each of the years ending 31 December 2022, 2023 and 2024, one or more of the applicable percentage ratios calculated according to Rule 14.07 of the Hong Kong Listing Rules will exceed 25%. The provision of engineering and construction services by the Group to Sinopec Group and/or its associates under the Engineering and Construction Services Framework Agreement will also constitute major transactions of the Company on an aggregated basis, and therefore is subject to the announcement, circular and Shareholders’ approval requirements under Chapter 14 of the Hong Kong Listing Rules.

VII. APPROVAL BY THE BOARD AND INDEPENDENT SHAREHOLDERS

On 20 August 2021, the Company held the sixteenth meeting of the third session of the Board. After discussion, all the non-connected Directors unanimously approved, among other things, the terms under each of the General Services Framework Agreement, the Technology R&D Framework Agreement, the Land Use Right and Properties Leasing Framework Agreement, Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the continuing connected transactions and major transactions contemplated thereunder and the proposed annual caps. The deposit and entrustment loan services under the Financial Services Framework Agreement will constitute a major transaction of the Company on an aggregated basis, and the engineering and construction services provided by the Group to Sinopec Group and/or its associates under the Engineering and Construction Services Framework Agreement will also constitute a major transaction of the Company on an aggregated basis. Since the relevant proposals are related to a connected transaction with the Company’s controlling shareholder and Mr. WU Wenxin serves as the management of Sinopec Group, thus Mr. WU Wenxin abstained from voting on the aforementioned proposals at the relevant Board meeting.

Mr. HUI Chiu Chung, Stephen, Mr. JIN Yong and Mr. YE Zheng, being the independent non-executive Directors, unanimously approved the relevant proposed resolutions. All non-connected Directors (including the independent non-executive Directors) considered that (i) each of the Framework Agreements and the connected transactions contemplated thereunder are on normal commercial terms in the ordinary and usual course of the Group’s business; and (ii) the terms, the connected transactions and the Annual Caps are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

Maxa Capital has been appointed as the Independent Financial Adviser and will advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the terms under each of the Framework Agreements, the connected transactions contemplated thereunder and the proposed annual caps and whether they are in the interests of the Company and the Shareholders as a whole. It will also advise the Independent Shareholders on how to vote and other relevant issues.

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According to the Hong Kong Listing Rules, the Independent Board Committee has been formed. After considering the advice from the Independent Financial Adviser, the Independent Board Committee will advise the Independent Shareholders on the fairness and reasonableness of the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the connected transactions and major transactions contemplated thereunder and the proposed annual caps, and whether they are in the interests of the Company and the Shareholders as a whole. To the best of the Directors’ knowledge, information and belief after making all due enquiry, no member of the Independent Board Committee has any material rights or interests in the aforementioned connected transactions.

The Company will convene the EGM for the Independent Shareholders to consider and approve (if think fit), among other things, the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreements, the continuing connected transactions and major transactions contemplated thereunder and the proposed annual caps. As of the date of this announcement, Sinopec Group directly and/or indirectly holds 2,967,200,000 Domestic Shares (including 59,344,000 Domestic Shares held by its whollyowned subsidiary, SAMC), representing approximately 67.01% of the total issued share capital of the Company. Sinopec Group therefore constitutes a controlling shareholder and a connected person of the Company.

A circular containing, amongst other things, (i) further details of the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the continuing connected transactions and major transactions contemplated thereunder and the proposed annual caps; (ii) a letter from the Independent Board Committee; (iii) a letter from Maxa Capital; and (iv) the notice of the EGM, will be dispatched by the Company to the Shareholders as soon as practicable.

VIII. PROCEDURES AND INTERNAL CONTROL MEASURES FOR PRICING AND TERMS OF THE CONTINUING CONNECTED TRANSACTIONS

The Company has implemented a suite of internal control measures for regulating the entering into of the continuing connected transactions (including the relevant pricing mechanisms). Such measures include the following:

• (1) The Company supervises the continuing connected transactions in accordance with the procedures set forth in the Company’s internal control measures on continuing connected transactions (including the relevant pricing mechanism).

• (2) For the general services provided by the Group to Sinopec Group where the market price is used, if the government-prescribed prices and governmentguided prices are not available, the Group will actively seek to obtain market price information through various channels. The Company, for example, may refer to the comparable prices between the Company and no less than two Independent Third Parties and those between the Independent Third Parties, or obtain market price information of the same or similar or services through industry websites, independent industry information vendors or events held by

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industry organizations. The Group will take into account of such market price information, and determine the final price with Sinopec Group through arm’s length negotiations on normal commercial terms. For the general services provided by the Group to Sinopec Group where the agreed price is used, the Group, as services provider, will provide our quotes to Sinopec Group, while Sinopec Group will review our quotes, compare with the comparable market prices of the same or similar or services, and determine the final prices. Meanwhile, such prices are also subject to the review of the finance departments of the Group, and finally determined by the management of the Group.

For the general services provided by Sinopec Group to the Group where the market price is used, the Company requests the service suppliers, including Sinopec Group and other independent services suppliers, to offer the quotes for the services provided. The Company will then review and compare such quotes, negotiate the offering terms, and select the service suppliers after taking into account of the offer price, services quality, specific needs of both parties, and the qualification and experiences of the services suppliers.

• (3) For the Technology R&D Services provided by the Group to Sinopec Group where the agreed price is used, with a view to arriving at a reasonable profit, the agreed price is determined through arm’s length negotiations between the relevant parties after making references to the average gross profit margins (generally around 15%, which will be adjusted subject to various factors including the size of the business and the technologies required) of similar businesses in the most recent financial year, and taking into account various factors, including the type of business, the complexity of the projects and the technologies involved, as well as the prevailing market and business conditions. As to the Group, such price is subject to the review and approval of the Company’s technology department (or the technology department of the relevant subsidiary of the Company), or depending on the actual circumstances, such price will be reported by the Company’s technology department to the Company’s management for its further review and approval (or will be reported by the technology department of the relevant subsidiary of the Company to the management of such subsidiary for its further review and approval). The technology department and the management of the Company or the technology department of the relevant subsidiary of the Company and the management of such subsidiary (as the case may be) will take into account factors including the type of business, the complexity of the projects and the technologies involved, as well as the prices of one to two relevant comparable services recently provided by the Group to Independent Third Parties in the past three months (if any) to ensure that the price of the Technology R&D Services provided by the Group to Sinopec Group is fair and reasonable, and is determined on normal commercial terms or on terms no less favorable to the Group than the terms available to Independent Third Parties.

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For the Technology R&D Services provided by Sinopec Group to the Group where the market price is used, before entering into any transactions under any technology R&D framework agreement with the relevant members of Sinopec Group, the Group will actively seek to obtain market price information through various channels, for example, obtaining quotes from at least one independent vendor which provides the same or similar products, technologies or services, and, where available, obtaining market price information of the same or similar products, technologies or services through various independent industry information vendors (such as industry organizations and professional organizations). The Company’s technology department will review and compare such quotes and, where available, the market price information with the quotes offered by the relevant members of Sinopec Group, or depending on the actual circumstances, the Company’s technology department will report the quotes and, where available, the market price information to the Company’s management for its further review, to determine whether to accept the quotes offered by the relevant members of Sinopec Group, so as to ensure that the price of the Technology R&D Services provided by Sinopec Group to the Group is fair and reasonable, and is determined on normal commercial terms or on terms no less favorable to the Group than the terms available from Independent Third Parties.

• (4) For the land use rights and property leasing services provided by the Group to Sinopec Group that involve market prices, the Company will actively obtain market rent information in the surrounding areas where the land and properties are located through various channels, for instance, referring to comparable rent for the same period between the Company and independent third parties (at least two or more) as well as comparable rent for the same period between independent third parties. The Group will refer to these market rent levels, and determine the final transaction price through arm’s length negotiations with Sinopec Group and in accordance with general commercial principles. The Group will ensure that the relevant terms are based on general commercial terms or no less favourable terms than those given to independent third parties by the Group.

For the land use rights and property leasing services provided by Sinopec Group to the Group that involve market prices, the Company will also refer to the market rent information in the surrounding areas where the land and properties are located after receiving the rental price quotation. After fully considering the comparable market rent and the actual needs of the Group, we finally entered into a land use right and house leasing agreement with Sinopec Group. The Group will ensure that the relevant terms are based on general commercial terms or no less favourable terms than those given to the Group by independent third parties.

• (5) For the engineering and construction services under the Engineering and Construction Services Framework Agreement provided by the Group to Sinopec Group under circumstances where the agreed price is used, with a view to arriving at a reasonable profit, such price will be determined through arm’s length negotiations between the relevant parties after making references to the gross profit margins of various business segments as disclosed in the Company’s annual report for the most recent financial year, and taking into account various factors, including the type of business, the complexity of

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the projects and the technologies involved, as well as the prevailing market and business conditions. As to the Group, such price is subject to the review and approval of the marketing department of the relevant subsidiary of the Company, or depending on the actual circumstances, such price will be reported by the marketing department of the relevant subsidiary of the Company to the management of such subsidiary for its further review and approval. The marketing department and the management (as the case may be) of the relevant subsidiary of the Company will take into account factors including the type of business, the complexity of the projects and the technologies involved, as well as the scope and the price of at least one relevant comparable service recently (generally in the past three months to around one year given that the agreed price is only applied for services under certain circumstances (e.g. for services with unique technological advantages)) provided by the Group to Independent Third Parties to ensure that the price of the engineering and construction services provided by the Group to Sinopec Group is fair and reasonable, and is determined on normal commercial terms or on terms no less favorable to the Group than the terms available to Independent Third Parties.

For the services under the Engineering and Construction Services Framework Agreement provided by Sinopec Group to the Group, relevant vendors will provide a cost list in respect of the relevant services provided by Sinopec Group to the Group, and the Group will then seek to obtain the prices of relevant comparable services provided by at least three (where applicable) independent vendors to determine the reasonable costs and profits for ascertaining the agreed price of the services provided by Sinopec Group to the Group through arm’s length negotiations between the relevant parties. As to the Group, such price is subject to the review and approval of the marketing department and the procurement department of the relevant subsidiary of the Company, or depending on the actual circumstances, such price will be reported by the marketing department and the procurement department of the relevant subsidiary of the Company to the management of such subsidiary for its further review and approval. The marketing department, the procurement department and the management (as the case may be) of the relevant subsidiary of the Company will take into account factors including the scope, the quality and the prices of relevant comparable services provided by independent vendors to ensure that the price of the services provided by Sinopec Group to the Group is fair and reasonable, and is determined on normal commercial terms or on terms no less favorable to the Group than the terms available from Independent Third Parties.

• (6) The finance department of the Group works closely with the other departments and subsidiaries to collect information such as transaction amounts and transaction terms, analyze and estimate if the actual transaction amounts of the continuing connected transactions may exceed the annual caps, form a joint inspection team which inspects the performance of connected transaction twice a year, recommend and enforce measures of enhancement to correct any noncompliant issues in a timely manner.

• (7) As part of its audit procedures for the first half-year audit, the Group’s external auditor will conducts checking on the pricing and the annual caps of the

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continuing connected transactions on a half-yearly basis. The Group’s external auditor also issues and submits an assurance report in respect to the continuing connected transactions to the Hong Kong Stock Exchange each year.

• (8) The Board will review the performance of the continuing connected transactions and the financial reports that consist of the actual transaction amounts of the continuing connected transactions incurred on a half-yearly basis. The Board will then opine on matters such as (i) whether the pricing policies/mechanisms were fully complied with by the Group and relevant connected person when performing the Framework Agreements; and (ii) whether the actual transaction amounts of the continuing connected transactions incurred exceed the annual caps as approved at the general meeting. The independent non-executive Directors will report to the Shareholders at the Shareholders’ meeting on an annual basis on their performance of such duties. Such report includes opinions on (i) whether the actual transaction amounts of the continuing connected transactions incurred exceed the annual caps as approved at the general meeting; (ii) whether the continuing connected transactions are performed pursuant to the pricing policies/mechanisms and other key requirements under the Framework Agreements; and (iii) whether the continuing connected transactions are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

• (9) The Group’s internal control and risk management departments conducts internal assessments on the enforcement of pricing policies/mechanisms and other internal control measures in respect of the continuing connected transactions on an annual basis, in order to ensure such internal control measures remain complete and effective.

• (10) The Supervisory Committee supervises the matters relating to the continuing connected transactions. It reviews the annual financial reports and interim financial reports of the Group which contains information regarding the performance of the continuing connected transactions on an annual basis. It will also review the compliance of the continuing connected transactions, whether the pricing policies/mechanisms are enforced, whether the prices are fair and reasonable and whether there is any act which may be detrimental to the interests of the Group and the Shareholders as a whole.

• (11) The Company’s Audit Committee reviews the annual report, annual financial report, interim report and interim financial report of the Group which contain information regarding the performance of the continuing connected transactions. It opines on the continuing connected transactions on matters such as the enforcement of the pricing polices/mechanisms, the fairness of the connected transactions and whether the actual transaction amounts of the continuing connected transactions incurred exceed the annual caps.

By implementing the above measures, the Directors consider that the Company has established sufficient internal control measures to ensure that the continuing connected transactions are fair and reasonable, on normal commercial terms or on terms no less favorable to the Company than the terms available to or from Independent Third Parties (as the case may be), and in the interests of the Company and the Shareholders as a whole.

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IX. GENERAL INFORMATION

1. The Company

The Company is an international engineering corporation, with the leading edge in the PRC. The Group provides engineering services for a broad range of industries including oil refining, petrochemicals, new coal chemicals, inorganic chemicals, pharmaceutical chemicals, clean energy, storage and transportation engineering, environmental protection and energy saving engineering with a complete service chain involving research, development and licensing, preliminary consultation, financial assistance, design, procurement, construction and pre-commissioning/ start-up services. With its industry experience of more than 60 years and continual innovation in technical expertise, the Group has achieved great success in the design and construction of large-scale and complex oil refining, petrochemical and new coal chemical projects, and possesses strong competitiveness.

2. Sinopec Group

Sinopec Group’s predecessor was China Petrochemical Corporation (中國石油化 工總公司), which was established in July 1983. China Petrochemical Corporation (中國石油化工集團公司) was established in July 1998 upon reorganisation of the former China Petrochemical Corporation (中國石油化工總公司) and restructured into China Petrochemical Corporation (中國石油化工集團有限公司) in August 2018. Sinopec Group is the largest integrated oil and petrochemical enterprise in the PRC and is one of the largest integrated oil and petrochemical enterprises in the world. Sinopec Group principally engages in businesses including: (i) exploration, development, production and trading of oil and gas; (ii) oil processing and production, trading, transportation, distribution and marketing of oil products; (iii) production, distribution and trading of petrochemical and other chemical products; (iv) oil engineering; (v) utilities services and social services such as water and electricity; and (vi) international trading, R&D as well as manufacturing of chemical fiber, fertilizer and polyester related equipment.

3. Sinopec Finance

Sinopec Finance is a non-banking financial institution incorporated in the PRC in 1988 and is subject to the Administrative Measures on Finance Companies within Group Enterprises 《(企業集團財務公司管理辦法》) and other relevant regulations promulgated by the PBOC and CBIRC. Sinopec Finance is 51% owned by Sinopec Group and 49% owned by Sinopec Corp. The establishment of such non-banking financial institutions is subject to approval by the CBIRC and its operation is subject to the ongoing supervision of the CBIRC. Non-banking financial institutions shall comply with applicable regulations relating to interests rates issued by the PBOC and CBIRC.

In the PRC, finance companies within group enterprises are only permitted under applicable PRC laws and regulations to provide financial services to enterprises within the same parent group. Therefore, Sinopec Finance only provides financial services to members of Sinopec Group, including us.

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As a non-banking financial institution, Sinopec Finance is subject to various regulatory and capital adequacy requirements, including capital adequacy ratios, loan-to-deposit ratios, limit on interbank loans and deposit reserve thresholds. The CBIRC (formerly known as “China Banking Regulatory Committee”, “ CBRC ”) issued a regulatory guideline 《(企業集團財務公司管理辦法》) in July 2004 (and as amended in December 2006) (the “ CBRC Guideline ”) with respect to the establishment and ongoing regulation of such non-banking financial institutions. The CBRC Guideline provided, among other things, that “when applying for establishment of a finance company, the board of directors of the parent company shall undertake in writing that, if, in an emergency, the finance company faces difficulties in meeting its payment obligations, the parent company will increase the capital of the finance company as required to solve such payment difficulties. Such undertaking shall be contained in the articles of association of the finance company.” Sinopec Group provided such undertaking to the CBRC on 18 December 2004 (the “ Parent Undertaking ”). The Parent Undertaking provides that, pursuant to the CBRC Guideline, Sinopec Group undertakes that if, in an emergency, Sinopec Finance faces difficulties in meeting its payment obligations, it will increase the capital of Sinopec Finance as required to solve such payment difficulties.

As at 31 December 2020, Sinopec Finance had total assets of RMB228.147 billion, shareholders’ equity of RMB29.761 billion, registered capital of RMB18 billion and a capital adequacy ratio of 20.02%. Based on the unaudited accounts of Sinopec Finance, as at 30 June 2021, Sinopec Finance had total assets of RMB232.499 billion, shareholders’ equity of RMB30.888 billion, registered capital of RMB18 billion and a capital adequacy ratio of 20.47%.

As at the date of this announcement, the business scope of Sinopec Finance as set out in its business license includes: (i) providing financial and financing consultancy, credit certification and related consultancy and agency services to members of the group; (ii) assisting members of the group in settlement; (iii) providing guarantees to members of the group; (iv) providing entrustment loan and entrusted investment services; (v) providing bill acceptance and discount services to members of the group; (vi) processing the settlement of internal transfers between accounts and providing solution plans for relevant settlement and clearing; (vii) taking deposits from members of the group; (viii) providing loan and finance leases to members of the group; (ix) conducting inter-borrowings among finance companies; (x) issuing corporate bonds of finance companies upon approval; (xi) underwriting the corporate bonds issued by members of the group; (xii) making equity investments in financial institutions; (xiii) making investments in negotiable securities; (xiv) providing consumer credits, buyers’ credits and finance lease services to products of members of the group; and (xv) approved insurance agency services.

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4. Sinopec Century Bright

Sinopec Century Bright is a company incorporated in Hong Kong with limited liability. It is licensed under the Money Lenders Ordinance (Cap. 163 of the Laws of Hong Kong). It is approved by the State Administration of Foreign Exchange of the PRC (中華人民共和國國家外匯管理局) as an offshore settlement center for centralized cash management for members of Sinopec Group in year 2007.

As at 31 December 2020, Sinopec Century Bright had total assets of US$45.49 billion and net assets of US$3.63 billion. Based on the unaudited accounts of Sinopec Century Bright, as at 30 June 2021, Sinopec Century Bright had total assets of US$59.36 billion and net assets of US$4.13 billion. In addition, Sinopec Century Bright has obtained an A2 rating from Moody’s with a stable outlook and an A rating from Standard & Poor with a stable outlook as well.

Sinopec Century Bright only provides financial services to members of Sinopec Group (including us). Sinopec Century Bright is used as an interim/short term deposit platform by us particularly to settle trade payables and receivables in respect of overseas projects.

X. DEFINITIONS

In this announcement, unless the context otherwise requires, the following expressions shall have the following meanings.

• “associate(s)” has the meaning ascribed thereto under the Hong Kong Listing Rules

• “Board” the board of directors of the Company

• “CBIRC” or “CBRC” China Banking and Insurance Regulatory Commission (中國銀行保險監督管理委員會) or its predecessor, China Banking Regulatory Commission (中國銀行業監 督管理委員會)

• “Company” SINOPEC Engineering (Group) Co., Ltd., a joint stock limited liability company incorporated under the laws of the PRC in August 2012, which is listed on the Hong Kong Stock Exchange (Stock Code: 2386)

• “connected person(s)” has the meaning ascribed thereto under the Hong Kong Listing Rules

• “connected has the meaning ascribed thereto under the Hong Kong transaction(s)” Listing Rules

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“controlling shareholder(s)”

has the meaning ascribed thereto under the Hong Kong Listing Rules

• “Director(s)”

• the director(s) of the Company

• “EGM”

• the first extraordinary general meeting of the Company for the year 2018 proposed to be convened

• “Engineering and Construction Services Framework Agreement”

an engineering and construction services framework agreement entered into between the Company and Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021

• “Financial Services Framework Agreement”

• a financial services framework agreement entered into between the Company and Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 22 April 2013, 28 August 2015, 21 August 2018 and 20 August 2021

• “Framework Agreements”

• the General Services Framework Agreement, the Technology R&D Framework Agreement, the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement

• “General Services

• Framework Agreement”

• a general services framework agreement entered into between the Company and Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021

• “Group” or

• the Company and its subsidiaries

• “we” or “us”

• “HK$”

• the lawful currency of Hong Kong

• “Hong Kong”

• the Hong Kong Special Administrative Region of the PRC

• “Hong Kong the Rules Governing the Listing of Securities on The Listing Rules” Stock Exchange of Hong Kong Limited, as amended, supplemented or otherwise modified from time to time

• “Hong Kong Stock Exchange”

The Stock Exchange of Hong Kong Limited

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• “Independent Board Committee”

• a committee comprising independent non-executive Directors namely Mr. HUI Chiu Chung, Stephen, Mr. JIN Yong and Mr. YE Zheng, which is set up for the purpose of advising the Independent Shareholders on the terms of the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the continuing connected transactions thereunder and the proposed annual caps

• “Independent Financial Adviser” or “Maxa Capital”

• Maxa Capital Limited, a licensed corporation permitted to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the Securities and Future Ordinance (Chapter 571 of the Laws of Hong Kong), which was appointed by the Company as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms under the Financial Services Framework Agreement and the Engineering and Construction Services Framework Agreement, the continuing connected transactions thereunder and the proposed annual caps

• “Independent Shareholders”

• Shareholders other than Sinopec Group and its associates

• “Independent Third Party(ies)”

• party(ies) not connected with any of the Directors, the supervisors, the chief executive, or the substantial shareholders of the Company or any of its subsidiaries or their respective associates

• “PBOC”

• the People’s Bank of China (中國人民銀行)

• “PRC” or “People’s Republic of China”

• the People’s Republic of China which, for the purpose of this announcement, excludes Hong Kong, Macau Special Administration Region of the PRC and Taiwan

• “Prospectus”

• the prospectus of the Company dated 10 May 2013

• “R&D”

• research and development

• “RMB” the lawful currency of the PRC

• “SAMC”

• Sinopec Assets Management Co., Ltd. (中國石化集 團資產經營管理有限公司), a company incorporated in the PRC with limited liability and a wholly-owned subsidiary of Sinopec Group

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“Share(s)”

share(s) in the share capital of the Company, with a nominal value of RMB1.00 each

• “Shareholder(s)”

• holder(s) of the Shares

• “Sinopec Century Bright”

Sinopec Century Bright Capital Investment Limited (中國石化盛駿國際投資有限公司), a limited liability company incorporated in Hong Kong on 29 November 1994 and a connected person of the Company, with 100% of its equity interest being held by Sinopec Group

• “Sinopec Corp.”

• China Petroleum & Chemical Corporation (中國石 油化工股份有限公司), a joint stock limited liability company incorporated under the laws of the PRC, which is listed on the Hong Kong Stock Exchange (Stock Code: 0386), Shanghai Stock Exchange (Stock Code: 600028), the London Stock Exchange (Stock Code: SNP) and the New York Stock Exchange (Stock Code: SNP) and is a subsidiary of Sinopec Group

• “Sinopec Finance”

• Sinopec Finance Co., Ltd. (中國石化財務有限責任公 司), a limited liability company incorporated in the PRC in 1998, with 49% of its equity interest being held by Sinopec Corp. and 51% of its equity interest being held by Sinopec Group, which is also a connected person of the Company

• “Sinopec Finance Sinopec Century Bright and Sinopec Finance Companies”

• “Sinopec Group”

• China Petrochemical Corporation (中國石油化工集 團公司), a state-owned enterprise incorporated under the laws of the PRC and established in July 1998 upon reorganisation of the former China Petrochemical Corporation (中國石油化工總公司), and our controlling shareholder

• “subsidiary” or has the meaning ascribed thereto in section 15 of the “subsidiaries” Companies Ordinance (Chapter 622 of the laws of Hong Kong), as amended, supplemented or otherwise modified from time to time

• “substantial has the meaning ascribed thereto in the Hong Kong shareholder(s)” Listing Rules

• “Supervisor(s)”

• the members of the Supervisory Committee

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“Supervisory the Company’s supervisory committee established Committee” pursuant to the Company Law

“Technology R&D Framework Agreement” “US$”

a technology R&D framework agreement entered into between the Company and Sinopec Group on 19 December 2012, as amended by supplemental agreements dated 28 August 2015, 21 August 2018 and 20 August 2021

the lawful currency of the United States of America

“%” percentage ratio

By order of the Board SINOPEC ENGINEERING (GROUP) CO., LTD. Jia Yiqun Chief Financial Officer, Company Secretary

Beijing, the PRC 23 August 2021

As at the date of this announcement, directors of the Company are: SUN Lili[#] , XIANG Wenwu[#] , JIANG Dejun[#] , WU Wenxin[*] , HUI Chiu Chung, Stephen[+] , JIN Yong[+] and YE Zheng[+] .

# Executive Directors

* Non-executive Director

+ Independent non-executive Directors

This announcement is available on the website of Hong Kong Exchanges and Clearing Limited (www.hkex.com.hk) and on the website of the Company (www.segroup.cn).

• For identification purposes only

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