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CONSUMER Tan Han Meng, CFA, CPA +65 6232 3839 han-meng.tan@dmgaps.com.sg Terence Wong, CFA +65 6232

CONSUMER

Tan Han Meng, CFA, CPA +65 6232 3839 han-meng.tan@dmgaps.com.sg

Terence Wong, CFA +65 6232 3896 terence.wong@dmgaps.com.sg

Stock Profile/Statistics

Bloomberg Ticker STI Issued Share Capital (m) Market Capitalisation (S$m) 52 week H | L Price (S$) Average Volume (3m) ‘000 YTD Returns (%) Net gearing (x) Altman Z-Score ROCE/WACC Beta (x) Book Value/share (S¢)

SUPER SP

 

2959.01

537.74

442.17

0.85

0.43

1089.48

27.34

Cash

4.82

1.67

0.72

0.52

Major Shareholders

Goi Seng Hui Te Lay Hoon Teo Kee Bock Te Kok Chiew

 

16.80%

12.57%

12.11%

10.00%

Share Performance (%)

Month

Absolute

Relative

1m

8.7

7.8

3m

26.4

20.0

6m

21.6

11.0

12m

79.1

17.0

6-month Share Price Performance

(S$)

0.90

 

0.85

 

0.80

 
0.80  

0.75

 

0.70

 
0.70    
 

0.65

0.65  
0.65  
 

0.60

 

0.55

0.50

 

2-Nov-09

2-Jan-10

2-Mar-10

April 30, 2010

SINGAPORE EQUITY Investment Research

Initial Coverage

Private Circulation Only

i a l C o v e r a g e Private Circulation Only SUPER COFFEEMIX
i a l C o v e r a g e Private Circulation Only SUPER COFFEEMIX

SUPER COFFEEMIX MANUFACTURING

BUY

Initiate

Price

S$0.815

Target

S$1.10

Higher payouts or M&A as cash grows

Re-discover a Super brand; Initiate with BUY. Established in 1987, Super Coffeemix Manufacturing (Super) is Singapore’s leading instant beverage group that commands ~11% market share in its key S$1.4b market, consisting of Singapore, Malaysia, Thailand and Myanmar. Super owns >10 brands. including Super, Owl and Café Nova, and offers 300+ products across 52 countries worldwide. Despite its resilience and high cash generative characteristics, current share price trades at early cycle valuation of 9x FY10E PE and offers a dividend yield of 4-5%. Initiate with BUY and TP of S$1.10, representing an upside potential of 35% over the next 12 months.

High cash generative characteristics. Super has emerged stronger from recent economic turmoil. Revenue and recurring net profit grew at an average of 8% and 22% per annum over 2007-09 respectively, on the back of strong contribution from its new ingredient sales division and margin expansion. Free cash flow generated in FY08 and FY09 were S$12m-S$60m (vs. recurring net profit of S$30m-S$38m) respectively. Following the divestment of its non-core assets in 1Q10, Super is likely to have a current cash balance of around S$120m,representing 30% of its market capitalisation. We believe this will result in higher payouts or M&A in the near future.

Potential upside catalysts. Super will continue to benefit from the region’s GDP growth and the current low Robusta coffee prices, which suggest above historical average margins in FY10E. The counter has attracted attention from the investment community since the announcement of its TDR dual-listing plan. We expect share price to respond positively to quarterly earnings momentum, its dual-listing in Taiwan in 2H10 and potential M&A news flow.

Downside risks. Key risks include unexpected sharp increases in raw material prices, delay in listing plans and potential M&A overpayments.

FYE Dec (S$’m)

2008

2009

2010E

2011E

2012E

Revenue Gross Profit Net Profit Net Profit - Recurring P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield (%) ROE (%) Net Gearing (%) Source: DMG estimates

300.2

296.3

335.3

384.0

425.9

99.8

103.4

134.8

153.8

171.8

25.1

40.2

64.4

55.2

59.6

30.3

38.3

50.8

55.2

59.6

14.6

11.4

8.6

7.9

7.3

1.7

1.5

1.3

1.2

1.1

9.4

7.8

5.0

4.3

3.5

2.0%

3.2%

4.8%

4.2%

4.5%

12%

14%

16%

15%

15%

-6%

-23%

-42%

-41%

-43%

See important disclosures at the end of this publication DMGOSK ResearchResearch

See important disclosures at the end of this publication

DMGOSK ResearchResearch

See important disclosures at the end of this publication DMGOSK ResearchResearch

1

TABLE OF CONTENTS

TABLE OF CONTENTS About the Company 3 Discussion 4 Forecast 6 Valuation and Downside Risks 7
TABLE OF CONTENTS About the Company 3 Discussion 4 Forecast 6 Valuation and Downside Risks 7

About the Company

3

Discussion

4

Forecast

6

Valuation and Downside Risks

7

Financial Tables

9

Disclaimer

10

See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

2

ABOUT THE COMPANY

ABOUT THE COMPANY Background Super Coffeemix Manufacturing (Super) was founded in Singapore in 1987 by Mr
ABOUT THE COMPANY Background Super Coffeemix Manufacturing (Super) was founded in Singapore in 1987 by Mr

Background Super Coffeemix Manufacturing (Super) was founded in Singapore in 1987 by Mr Teo Kee Bock, Mr Te Kok Chiew and Ms Te Lay Hoon. Its principal activities are manufacturing and managing its own brands of instant beverages and food products. Super was listed on Sesdaq in July 1994 and upgraded to the Mainboard in February

1998.

Currently, Super is preparing for the listing of Taiwan Depository Receipts (TDRs) representing an aggregate of up to 30m new ordinary shares in the company on the Taiwan Stock Exchange (TSE). The new issuance may lead to an EPS dilution of not more than 5.2%. As TDRs are non-fungible in nature, there will not be arbitrage opportunity between Super’s TDRs and ordinary shares. However, should the TDR listing go through, Super will have another equity fund-raising channel going forward.

Figure 1: Board and Major Shareholders

Board Teo Kee Bock Goi Seng Hui Te Lay Hoon Te Kok Chiew

 

Designation Chairman/ MD Vice Chairman/ Non-exe director Exec director Exec director

No. of Shares ('m)

%

65

12.11%

90

16.80%

68

12.57%

54

10.00%

Other Major Shareholders YHS Investment CIM II Limited

 

65

12.10%

39

7.30%

Total Number of Shares

 

538

Source: Company 2009 AR

Product Super has 300+ products ranging from instant coffee, cereals, canned drinks, instant noodles to non-dairy creamers. These products are sold under its own brands including Super, Owl, Café Nova, Super Power and Coffee King. Revenue breakdown by its two key divisions is Branded Consumer Goods – coffee (67%), cereal (9%), and others (13%); Ingredient Sales – non-dairy creamer (7%) and soluble coffee powder (3%).

Production facilities Super operates 13 manufacturing facilities in Singapore, Malaysia, China, Myanmar and Thailand. Its facilities are ISO9001, ISO22000 and HACCP certified, and have a combined annual production capacity of 10,000 tonnes for soluble coffee and 50,000 tonnes for creamers. Currently, it is the only company in the region with manufacturing capabilities for instant soluble coffee, cereal flakes and non-dairy creamer. Average inventory turnover is around 120 days.

Customer Super distributes its products directly or through 3 rd party distributors to 52 countries worldwide. Its key markets are Singapore (est. 12% of revenue), Malaysia (13%), Thailand (30%), Myanmar (16%) and China (12%), based on its receivables breakdown. Average trade receivables turnover is around 80 days.

Suppliers Raw materials include robusta coffee bean, sugar, and palm oil, which collectively make up 75% of its cost of goods sold. Other cost components include packaging (15%) and overhead (10%) costs. Average trade payables turnover is around 50 days.

See important disclosures at the end of this publication DMGOSK ResearchResearch

See important disclosures at the end of this publication

DMGOSK ResearchResearch

See important disclosures at the end of this publication DMGOSK ResearchResearch

3

KEY POINTS

KEY POINTS Industry Dynamics The instant coffee industry in Asia is relatively matured and dominated by
KEY POINTS Industry Dynamics The instant coffee industry in Asia is relatively matured and dominated by

Industry Dynamics The instant coffee industry in Asia is relatively matured and dominated by a few key MNC players (e.g. Nestle and Sara Lee) and local ones (e.g. Super and Aik Cheong). While a stable demand for instant coffee has provided support for industry growth, competition is intense and companies have to invest heavily on new innovations to broaden product range or rejuvenate existing ones so as to gain or sustain their market shares. In addition, many of them have ventured into new markets to seek growth opportunities.

Revenue Growth Driven by New Products, Markets and Uses Super’s 2006-09 growth was driven mainly by a) launch of new products, b) entrance into new markets and c) introduction of new uses. New products launched in 2007 include the “Super Power” and “Ipoh White Coffee” series, which are followed by extension of product lines e.g. “reduced sugar” and “no-sugar” variants. Super has also ventured into new markets such as South Africa, extending its reach to 52 countries (2004: 30+) worldwide. Product innovation and market expansion are estimated to account for around 60% of revenue growth during the period.

In a similar practice adopted by international branded players that ventured into private label manufacturing during tough times, Super leveraged on its manufacturing capabilities and started to supply ingredients to commercial users in 2008. The ingredient sales division currently makes up around 11% (FY06: 1%) of the Group’s revenue.

Figure 2: Key Revenue Growth Drivers - New Products, Markets and Uses

320 S$'m Ingredient sales to industry was a new revenue driver for FY08 growth 300
320
S$'m
Ingredient sales to industry was a new
revenue driver for FY08 growth
300
Product innovation and market
280
expansion were the traditional
drivers to acheive revenue
growth
260
240
220
200
FY06
BCG
IS
FY07
BCG
IS
FY08
BCG
IS
FY08

Figure 3: Divisional Sales and Growth Trend

   

S$’m

   

Growth %

FYE Dec

2006A

2007A

2008A

2009A

2007A

2008A

2009A

Total sales

211

254

300

296

20%

18%

-1%

BCG-Coffee products

157

192

193

199

23%

1%

3%

BCG-Cereal products

21

24

27

27

17%

12%

1%

BCG-Others

32

34

45

39

8%

31%

-14%

IS - Non-diary creamer

1

3

26

22

Nm

Nm

-16%

IS - Soluble coffee powder

0

0

9

9

20%

18%

-1%

Source: DMG estimates, Company

See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

4

KEY POINTS

KEY POINTS Strong Pricing Power Helped to Withstand Margins Pressure Super’s raw materials (robusta coffee bean,
KEY POINTS Strong Pricing Power Helped to Withstand Margins Pressure Super’s raw materials (robusta coffee bean,

Strong Pricing Power Helped to Withstand Margins Pressure Super’s raw materials (robusta coffee bean, sugar and palm oil) make up 75% of cost of goods sold. Correlation between input costs and gross margin is estimated at -0.6.

Our analysis suggests that Super enjoys relatively strong pricing power that allows it to pass on input cost increases to consumers. In FY08, raw material prices increased 35% but gross margin fell by a less-than-proportionate 1ppt to 33%. Flexibility in pricing helped to push FY09 gross margin to 35% (FY07: 34%), even though raw material prices remained above FY07 levels.

Figure 4: Raw Material Costs (6month lag) vs. Gross Margin %

2500 36% 35% 35% 2000 35% 34% 1500 34% 33% 34% 1000 33% 500 33%
2500
36%
35%
35%
2000
35%
34%
1500
34%
33%
34%
1000
33%
500
33%
0
32%
2007
2008
2009
GM % (RHS)
Robusta
Sugar
Palm Oil

Source: DMG estimates, Company

Cash Flow Accretive Investments As part of its plan to streamline its operations and house F&B business under one roof, Super has recently divested its interests in two non-core businesses, namely Jiangsu Hengshun (a vinegar manufacturer) and Care Property (a property developer) and is likely to recognise a disposal gain of S$14m.

Figure 5: Performance of Recent Investments

Companies

Year

Cost S$'m

Est. Gain S$’m

Status

Owl Coffee

2003

6.0

Na

To keep

Jiangsu Hengshun

2006

14.0

3.5

Sold in 1Q10

Care Property

2006

10.1

10.1

Sold in 1Q10

Sun Resources

2005

7.7

Na

To sell

Tianjin Super Lifestyle Food

2007

3.5

Na

Provision

Source: DMG estimates, Company

High Net Margins on Tax Incentives Operating costs are relatively stable i.e. selling expenses are kept at around 13% of revenue, and administrative expenses hover around 11%. Due to various tax incentive schemes, Super enjoys effective tax rates of 6% (Singapore corporate tax: 18%) over the past two years, resulting in FY09 recurring net margin of 13% that is the highest since its listing.

See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

5

FORECAST

FORECAST In deriving our forecasts, we made several key assumptions, which are: i. Consumers to remain
FORECAST In deriving our forecasts, we made several key assumptions, which are: i. Consumers to remain

In deriving our forecasts, we made several key assumptions, which are:

i. Consumers to remain cost conscious. Based on IMF’s estimates, Super’s key markets are expected to experience strong growth in 2010-11, providing support for instant coffee demand. However, we expect consumers to remain cost conscious in their purchasing behaviour, which will augur well for mass-market players such as Super.

Figure 6: Selected Countries’ GDP

Real GDP % Chg

Est. Revenue

Countries

2008

2009

2010E

2011E

Exposure

Singapore

1.4

(2.0)

5.7

5.3

12%

Malaysia

4.6

(1.7)

4.7

5.0

13%

Thailand

2.5

(2.3)

5.5

5.5

30%

Myanmar

3.6

4.8

5.3

5.0

16%

China

9.6

8.7

10.0

9.9

12%

Source: IMF

ii. Low input cost to drive margin expansion. Average price of robusta coffee bean of around US$1,400/ton over the past nine months (FY09: US$1,800/ton) provides margin visibility up to 3Q10. At US$1,400, gross margin is likely to trend above 40%. We expect current low inflationary environment to continue and gross margins to hover around 40% level over the next two years.

Figure 7: Raw Material Costs (6month lag) vs. Gross Margin % 2500 45% 40% 40%
Figure 7: Raw Material Costs (6month lag) vs. Gross Margin %
2500
45%
40%
40%
34%
33%
35%
2000
35%
30%
1500
25%
20%
1000
15%
10%
500
5%
0
0%
2007
2008
2009
2010
GM % (RHS)
Robusta
Sugar
Palm Oil

Source: DMG estimates, Company

iii. High Cash Generation. Based on our estimates, recurring free cash flow will average around S$35m p.a. over the next three years. In addition, Super will likely have a cash balance of S$140m (w/o TDR), or S$165m (w/ TDR) by FY10. Although management has not disclosed details on its cash deployment plan, we believe it could come in the form of higher dividend payouts and potential M&A.

See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

6

FORECAST

FORECAST Net Profit Stress Test Our FY10E revenue and gross margin estimates are S$335m and 40%
FORECAST Net Profit Stress Test Our FY10E revenue and gross margin estimates are S$335m and 40%

Net Profit Stress Test Our FY10E revenue and gross margin estimates are S$335m and 40% respectively. Our net profit sensitivity analysis suggest i) +1% in revenue will increase our net profit estimate by 3%, and ii) -1ppt in GM will shave it by 7%.

Figure 8: Net Profit Sensitivity Analysis (S$’m)

152

-10%

-5%

Revenue

0

+5%

+10%

Gross Margin

42%

43

50

57

64

71

41%

40

47

53

60

67

40%

38

44

51

58

65

39%

34

40

47

53

60

38%

31

37

43

50

56

Source: DMG estimates

See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

7

VALUATION

VALUATION At S$0.83, share price trades at 8.6x FY10E P/E, below its historical mean. Early cycle
VALUATION At S$0.83, share price trades at 8.6x FY10E P/E, below its historical mean. Early cycle

At S$0.83, share price trades at 8.6x FY10E P/E, below its historical mean. Early cycle valuation is likely due to limited familiarity with the counter and hence, presents investors with opportunities for potential returns.

We use forward PE as our preferred valuation methodology as share price will likely respond positively to earnings momentum. Our TP is pegged to its 8-year historical average of 11.3x FY10E. Our derived TP is S$1.10/share, which represents 35% upside potential on a 12- month horizon.

Key risks to our estimates include unexpected sharp increase in raw material prices, delays in TDR dual-listing plans and M&A overpayments.

Figure 9: Valuation Comparison

 

Mkt

3m

Company

Rating

Price

Cap

Avg

P/E (x)

P/B (x)

Yield (%)

 
 

Vol

 

29Apr

S$'m

S$m

09A

10E

11E

09A

10E

11E

11E

09A

10E

11E

DEL MONTE PACIFIC

NR

0.39

416

0.17

26.2

8.9

7.9

1.5

1.4

1.3

3.0

8.3

9.8

PETRA FOODS

NR

1.12

596

0.02

17.2

15.3

10.2

2.0

1.9

1.7

2.7

3.5

4.0

CEREBOS PACIFIC

NR

3.75 1182

0.33

14.3

13.0

12.1

3.3

3.2

3.0

6.6

6.6

6.6

EU YAN SANG

NR

0.58

210

0.12

16.0

Na

Na

2.2

Na

Na

3.8

Na

Na

THAI BEVERAGE

NR

0.28 7031

1.97

15.6

14.5

13.7

2.9

2.8

2.7

5.0

5.5

5.9

BREADTALK GROUP

NR

0.63

176

0.30

15.7

13.8

12.7

2.9

2.4

2.0

1.3

1.6

1.8

 

17.5

13.1

11.3

2.5

2.3

2.1

3.7

5.1

5.6

 

BUY

0.82

442

0.83

11.4

8.6

7.9

1.51 1.31

1.17

3.2

4.9

4.2

SUPER COFFEEMIX Source: DMG; Bloomberg

Figure 10: Forward P/E Figure 11: Forward P/B 20 2.30 2.10 18 1.90 16 +1SD=14.7
Figure 10: Forward P/E
Figure 11: Forward P/B
20
2.30
2.10
18
1.90
16
+1SD=14.7
1.70
+1SD=1.5
14
1.50
12
Ave=1.2
1.30
10
Ave=11.3
1.10
8
0.90
-1SD= 7.8
6
-1SD= 0.8
0.70
4
0.50
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Figure 12: Forward EV/EBITDA
18
16
14
12
+1SD=9.3
10
8
6
Ave=6.5
4
-1SD= 3.7
2
0
Jan-02
Apr-03
Jul-04
Oct-05
Jan-07
Apr-08
Jul-09
Source: DMG estimates
See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

8

Financial Table

Financial Table Income Statement FYE Dec (S$’mn) Revenue COGS Gross Profit Other income Distribution costs Admin
Financial Table Income Statement FYE Dec (S$’mn) Revenue COGS Gross Profit Other income Distribution costs Admin

Income Statement FYE Dec (S$’mn) Revenue COGS Gross Profit Other income Distribution costs Admin expenses Opg Profit Finance costs PBT Tax Net Profit Net Profit -Recurring

Balance Sheet FYE Dec (S$’mn) Cash Trade receivables OR/Prepayments Inventories

Fixed asset Other LT asset

Trade & Bill payables Other payables ST Debt

LT Debt Other LT liabilities

Shareholder's equity

Cash Flow Statement FYE Dec (S$’mn) Operating CF Investing CF Financing CF Free cash flow FCF Yield

Liquidity Net Cash (Debt) Net Debt/Equity EBIT/Interest exp (x) Days receivables Days inventory Days payables

2008A

2009A

2010E

300.2

296.3

335.3

(200.4)

(192.9)

(200.5)

99.8

103.4

134.8

1.3

3.7

2.5

(35.5)

(36.5)

(43.6)

(28.2)

(28.7)

(36.9)

36.1

41.7

56.8

(0.5)

(0.4)

(0.4)

27.5

42.8

70.3

(1.5)

(2.4)

(4.2)

25.1

40.2

64.4

30.3

38.3

50.8

2008A

2009A

2010E

28.6

73.6

145.6

59.9

59.5

75.9

5.2

6.5

9.2

76.9

55.3

68.9

107.8

102.8

106.7

65.9

67.1

47.3

23.9

19.7

32.2

35.4

40.1

71.6

5.5

2.1

2.1

3.6

2.0

2.0

15.6

13.1

13.1

249.8

277.2

320.4

2008A

2009A

2010E

34.9

66.3

61.1

(22.8)

(6.5)

24.9

(7.9)

(15.1)

(14.0)

12.1

59.8

86.0

2.7%

13.7%

19.6%

2008A

2009A

2010E

16.7

66.4

138.4

-6%

-23%

-42%

63.9

90.8

128.6

79

81

93

140

105

125

108

113

105

2011E

2012E

384.0

425.9

(230.2)

(254.1)

153.8

171.8

1.4

1.6

(49.9)

(55.4)

(42.2)

(46.8)

63.1

71.2

(0.4)

(0.4)

62.1

70.2

(5.0)

(8.4)

55.2

59.6

55.2

59.6

2011E

2012E

161.2

184.5

92.1

108.0

15.8

19.8

82.0

97.4

110.3

113.6

47.3

47.3

42.1

52.5

77.9

87.4

2.1

2.1

2.0

2.0

13.1

13.1

357.3

397.3

2011E

2012E

45.4

49.9

(8.6)

(8.4)

(21.2)

(18.2)

36.9

41.5

8.4%

9.5%

2011E

2012E

154.0

177.3

-41%

-43%

144.4

163.1

103

110

130

140

110

115

Profitability

2008A

2009A

2010E

2011E

2012E

Sales Gth YoY

18%

-1%

13%

15%

11%

EBITDA Gth YoY

40%

6%

25%

11%

12%

Net Profit Gth YoY

18%

26%

33%

9%

8%

Gross margin

33%

35%

40%

40%

40%

EBITDA margin

15%

16%

18%

17%

18%

Operating margin

12%

14%

17%

16%

17%

Dupont Analysis

2008A

2009A

2010E

2011E

2012E

Leverage A/E (x)

1.32

1.27

1.36

1.37

1.38

Asset Turn S/A (x)

0.87

0.81

0.74

0.75

0.75

Net margin

10%

13%

15%

14%

14%

12%

14%

16%

15%

15%

ROE ROA

9%

10%

11%

11%

10%

Valuation

2008A

2009A

2010E

2011E

2012E

PER (x)

14.6

11.4

8.6

7.9

7.3

PBR (x)

1.70

1.52

1.32

1.18

1.06

EV/EBITDA (x)

9.4

7.8

5.0

4.3

3.5

Dividend yield

2.0%

3.2%

4.8%

4.2%

4.5%

PER -FD (x) ex-cash

12.05

7.45

4.66

5.43

5.03

See important disclosures at the end of this publication DMG Research

See important disclosures at the end of this publication

DMG Research

See important disclosures at the end of this publication DMG Research

9

DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report.

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See important disclosures at the end of this publication

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