Citic Securities Company Limited(600030) about Hengyi Petrochemical Co.Ltd(000703)
Verification opinions on carrying out commodity hedging business in 2022
Citic Securities Company Limited(600030) (hereinafter referred to as ” Citic Securities Company Limited(600030) “) as the sponsor of Hengyi Petrochemical Co.Ltd(000703) (hereinafter referred to as ” Hengyi Petrochemical Co.Ltd(000703) ” and “the company”) to publicly issue convertible corporate bonds, in accordance with the stock listing rules of Shenzhen Stock Exchange and the guidelines for self discipline supervision of listed companies of Shenzhen Stock Exchange No. 1 – standardized operation of listed companies on the main board and other relevant provisions, Prudential verification has been conducted on Hengyi Petrochemical Co.Ltd(000703) commodity hedging business in 2022. The specific verification is as follows:
1、 Commodity hedging business
1. Hedged commodities: crude oil, naphtha, benzene, para xylene (PX), ethylene glycol (MEG), purified terephthalic acid (PTA), refined oil, polyester fiber, polyester bottle chip, energy products and other commodities related to the company’s main business.
2. Estimated investment capital: according to the company’s capacity scale, it is estimated that the margin for commodity hedging business in 2022 will not exceed RMB 160 million.
3. Source of funds: the company and its subsidiaries will use their own funds for commodity hedging business.
4. Development mode: the chairman of the board of directors of the company shall authorize the chairman to organize and establish the company’s commodity leading group as the decision-making body to manage the company’s commodity hedging business, and operate in accordance with the relevant provisions and processes of the company’s established commodity derivatives trading management system.
2、 Necessity of commodity hedging business
Hengyi Petrochemical Co.Ltd(000703) is a leading company mainly engaged in petrochemical and chemical fiber. At present, its main business products include: paraxylene (PX), benzene, refined oil, purified terephthalic acid (PTA), polyester fiber, polyester bottle chip, caprolactam and other products, as well as the main raw materials required for production, such as crude oil and ethylene glycol (MEG). In order to avoid the impact of large fluctuations in the above commodity prices on the company’s operating performance, lock in the price difference between the company’s products and raw materials and stabilize the company’s operating profits, the company needs to carry out commodity hedging business, carry out risk control, increase price risk control means and promote business development.
3、 Feasibility of carrying out commodity hedging business
As the price of the above raw materials, products or energy products fluctuates sharply, it will have an impact on the profitability of the company. The board of Directors believes that it is feasible to avoid the risk of price fluctuation by carrying out commodity hedging business, which is beneficial to production and operation.
4、 Preliminary preparation for commodity hedging business
The company reviewed and approved the commodity derivatives trading management system at the 2014 annual general meeting of shareholders held on April 17, 2015 and the commodity derivatives trading management system (2017 Revision) at the 22nd Meeting of the ninth board of directors held on January 17, 2017, Personnel involved in commodity hedging business are required to operate in strict accordance with relevant regulations and procedures. At the same time, the company’s personnel involved in commodity hedging business have received special training and fully understand the characteristics and risks of the types of commodity hedging business involved.
With the gradual improvement of the company’s business model and internal control system, the company will strengthen the supervision and risk control of hedging business.
5、 Carry out commodity hedging business and control the scale
According to the estimation of the company’s production capacity in 2022 and the recent price of raw materials and polyester commodities, in order to effectively carry out hedging business and control risks, combined with the actual business needs of the company, the amount of deposit invested by the company in commodity hedging business in 2022 is no more than RMB 160 million (the amount of physical delivery is not included), This amount fully takes into account the comprehensive effects of the company’s operation and market, as well as the needs of the company’s new projects and projects to be put into operation. The authorization period starts from the date of deliberation and approval of the second extraordinary general meeting of shareholders in 2022 to the date of convening the corresponding general meeting of shareholders in the next year.
6、 Risk analysis of commodity hedging business
1. Market risk: when the market changes sharply, the company may not be able to fully lock the price of raw materials or products, resulting in losses.
2. Liquidity risk: for commodity hedging transactions, operating instructions are issued within the authority specified in the company’s commodity derivatives trading management system. If the market fluctuates too much, it may lead to actual losses caused by forced closing of positions due to lack of time to supplement margin.
3. Operational risk: due to the strong professionalism and complexity of futures and forward trading, there may be accidental losses due to defects in information system or internal control.
4. Credit risk: when the price fluctuates greatly against the counterparty, the counterparty may violate the relevant provisions of the contract, cancel the contract and cause losses to the company.
5. Legal risk: due to changes in relevant legal systems or the counterparty’s violation of relevant legal systems, the contract may not be executed normally and bring losses to the company.
7、 Risk control measures to be taken by the company
1. The company’s hedging business plan is formulated according to the market and actual operating conditions, in order to avoid the adverse impact of price fluctuations on operating benefits. The company arranges planning, approval, instruction issuance, operation, audit and other links in strict accordance with the provisions of the company’s commodity derivatives trading management system, and carries out corresponding management.
2. The company matches the commodity futures hedging business with the company’s production and operation to hedge the risk of price fluctuation. The company’s commodity hedging business is limited to commodity varieties related to raw materials or products required by the company’s business.
3. Strictly control the capital scale of hedging, and reasonably plan and use margin. The company has stipulated the design principle of hedging scheme and the specific approval authority of hedging scheme. The company’s hedging business is only for the purpose of avoiding commodity price risk and does not involve speculation and arbitrage transactions. At the same time, it will strictly follow the provisions on floor trading. The varieties of hedging business are limited to the raw materials and products required by the company. Among them, the number of hedges shall not exceed the number of actual spot transactions, The commodity position cannot exceed the hedged spot quantity.
4. The company stipulates that commodity traders shall operate in strict accordance with the approved hedging scheme, and stipulates the system of preparing commodity trading reports on a daily basis and submitting them to relevant audit departments or approvers to ensure the control of commodity trading risk.
5. Establish a hedging transaction account in the name of the company, use its own funds, and shall not use the raised funds for hedging directly or indirectly.
8、 Accounting policies and accounting principles
The relevant accounting policies and accounting principles of the company’s commodity hedging business shall be implemented in accordance with the relevant provisions of the accounting standards for business enterprises – recognition and measurement of financial instruments and the accounting standards for business enterprises – hedging issued by the Ministry of finance of the people’s Republic of China.
9、 Approval procedure
(I) opinions of independent directors
The independent directors of the company express the following independent opinions on the company’s commodity hedging business:
1. The relevant approval procedures for the company to use its own funds to carry out commodity hedging business comply with relevant national laws, regulations and the articles of association.
2. The company has established a sound decision-making and risk control organization for carrying out commodity hedging business, formulated the commodity derivatives trading management system, strictly implemented the operating procedures and implemented in accordance with the system requirements. 3. The company’s commodity hedging business is mainly to avoid the risk of price fluctuation of raw materials and products, which is closely related to the company’s operation and does not damage the interests of the company and all shareholders.
4. The maximum amount and transaction type of annual hedging margin determined by the company meet the actual needs of the company, which is conducive to the company’s reasonable control of transaction risk.
5. As an effective tool to avoid the risk of price fluctuation, commodity hedging business can give full play to the company’s competitive advantage by strengthening internal management, implementing risk prevention measures and improving business level. It is necessary for the company to carry out hedging business and the risk can be controlled. The company’s commodity hedging business is conducive to ensuring the company’s operating benefits and reducing production and operation risks.
Agree to carry out commodity hedging business.
(II) opinions of the board of directors
The company held the 16th meeting of the 11th board of directors on January 21, 2022. The meeting considered and adopted the proposal on carrying out commodity hedging business in 2022 by 9 votes in favor, 0 against and 0 abstention, and agreed that the company and its subsidiaries should carry out commodity hedging business in 2022.
This commodity hedging business needs to be submitted to the general meeting of shareholders of the company for deliberation. This matter does not involve related party transactions, and there is no need to perform the decision-making procedures of related party transactions.
10、 Verification opinions of the recommendation institution
After verification, the sponsor believes that it is necessary for the company to carry out commodity derivatives trading in order to avoid the risk of price fluctuation of raw materials and products. The company has established effective risk control measures in accordance with the requirements of relevant laws and regulations, in line with the requirements of relevant laws, regulations and normative documents such as the company law, the stock listing rules of Shenzhen Stock Exchange, in line with the interests of the company, and there is no damage to the interests of the company and shareholders, especially the interests of minority shareholders. The matter has been deliberated and approved at the 16th meeting of the 11th board of directors. The independent directors have expressed their independent opinions, fulfilled the necessary approval procedures, and complied with the articles of association and other relevant provisions. The matter needs to be submitted to the general meeting of shareholders for deliberation.
To sum up, the recommendation institution agrees the company to carry out commodity hedging business in 2022.
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(there is no text on this page, which is the signature page of Citic Securities Company Limited(600030) verification opinions on Hengyi Petrochemical Co.Ltd(000703) carrying out commodity hedging business in 2022)
Sponsor representative:
Mao Zongxuan, Xu Rui
Citic Securities Company Limited(600030) mm / DD / yy
