Pou Sheng International (3813 HK)

Rating BUY Maintain

A good start in 1Q21 Target Price HKD 3.03 From HK$2.74 Current price HKD 1.83 Upside: +65.6% % 1Q21 net profit beat on higher GM and stringent cost control Result takeaway PS has kicked off well in FY21, with revenue grew 59.2% to ~US$1,128mn and net profit attributable to shareholders turnaround and arrived at US$55mn. PS 14 May 2021 revenue and net profit reached 25%/36% of our FY21E forecast. We attributed the net profit beat to better than expected GM (1Q21: 34.3% vs. CIRL estimate at 33.3% )and lower SG&A ratio (1Q21: 28.4% vs. CIRL estimate at 29.0%) , while Hayman Chiu OPM hit 7.0% mark thanks to improved channel structure, omni-channel [email protected] integration and lower retail discount (852) 2235 7677 PS cash conversion cycle further shortened to 107 days (vs. 142 days/ 156 days in 4Q20/FY19), in RMB terms, mainly driven by lower inventory turnover days at Trading Data 115 (vs. 143 days in FY20). PS total borrowings maintained at ~ RMB2,000mn in 1Q21, and net gearing ratio was at 8.6%, still significantly lower than 26.8% in 52-Week Range (HK$) 2.34/1.40 1Q20. PS net closed further 68 stores in 1Q21, in which direct operation store 3 Mth Avg Daily Vol (m) 4.57 took up all the store closures (-70 stores vs. end-2020). No of Shares (m) 5,356.9 Market Cap (HK$m) 9,803.0 Management sticked to their FY21E revenue growth and OPM guidance at Major Shareholders (%) Yue Yuen (62.41%) high-teens and 7% respectively, in which omni-channel sales would reach high Auditors Deloitte teens of total revenue. The OPM target would be achieved through i) improved sales efficiency from offline channel (i.e. increased contribution of large size Result Due 2Q21E: Aug 2021 stores to drive sales, FY19/FY20/1Q21 accounted for 9%/13%/13% of directly operated stores), ii) sequential GM improvement. Company description

1Q21 SSSG grew > 30% Yoy; Apr sales slipped due to boycott Established in 1989 and listed in June 2008, Pou headwinds, early signs of recovery in May Sheng (PS) is one of the leading sportswear distributors in China with ~25% market share. In PS 1Q21 SSSG came in at 32.3% Yoy in 1Q21 (vs. high 20’s You in 2M21), we addition to Nike and , the company adopts believe this was mainly driven by i) lower inventory level and hence lower retail multi- strategy and distributes , discount, and ii) China’s economy continue to pick up in 4Q20 and stabilized , Under Armour and PONY products etc. COVID-19 help consumer sentiment. PS sales in Apr 2021 dropped 11.4% Yoy/17.1% MoM due to boycott headwinds. Management indicated during As of Mar 31, 2021, Pou Sheng’s retail network the con call yesterday evening that sales during the first week of May have comprises of 9,007 stores, in which ~57% are reached similar level vs. that in 2019. directly operated stores.

Pou Sheng’s omni-channel revenue soared 55.1% Yoy and accounted for 17% of total revenue, in which B2C sales contribution further increased to 83% (vs. Price Chart 73% by end 4Q20. We attributed the encouraging result to Product Sharing HK$ Platform (PSP) which currently cover >60% of direct brick & mortar stores and 3.5 regional warehouses to share inventory and provide data to 3rd party platforms. 3.0 2.5 Pan-WeChat (incl. WeChat stores, Douyin live-streaming and shopping mall 2.0 platforms) sales took up ~4.6% of retail revenue with better ASP, conversion and 1.5 return rate) to drive online traffic. We continue to believe improvement in 1.0 operating efficiency would be achieved through i) increasing PSP coverage, ii) 0.5

enhancing online business through YYSports platform and co-operating 0.0

Feb-20 Feb-21 Feb-19

Nov-18 Nov-19 Nov-20

Aug-18 Aug-20 May-19 Aug-19 May-20 with strategic partners, hence achieving economy of scale to drive PS May-18 earnings/margin in the long run. Sources: Bloomberg, CIRL Lift FY21E/22E EPS on higher GM forecast; Maintain BUY with new TP at HK$3.03, advise to pay attention to pace of monthly sales recovery

We lift Pou Sheng’s FY21E/22E EPS by 15.0%/18.6% respectively on higher GM assumption. PS is trading at undemanding FY21E 7.1x P/E (>1 s.d. below 5-year average and ~66% discount to Topsports), We believe PS still deserve a re-rating story as their operating efficiency and profitability would further improve. We derived Pou Sheng’s new TP at HK$3.03, hence implying FY21E 11.7x target PE, we maintain Pou Sheng’s rating at BUY. However, we advise investors to pay attention to May and June sales figures, and stay cautious of near term price volatility due to boycott headwinds.

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Exhibit 1: We fine tuned Pou Sheng’s FY21E/22E EPS forecasts (USDExhibit Mn) 1: FY21E (old) FY21E (new) Diff FY22E (old) FY22E (new) Diff

RevenuePork 4,488 4,488 0.0% 5,199 5,199 0.0%

products 1,495 1,517 1.5% 1,752 1,794 2.4% GP sold in GPM 33.3% 33.8% +50 bps 33.7% 34.5% +80 bps supermark et Net Profit 153 176 15.0% 203 241 18.6% counters EPS 0.029 0.033 15.0% 0.038 0.046 18.6%

Source: CIRL estimates

Exhibit 2: Pou Sheng’s 1Q21 SSSG returned to +ve territory (left), Adidas latest quarterly sales (end- Mar) in Greater China rocketed

40.0 200.0 30.0 32.3 150.0 156.0 20.0 14.0 12.3 100.0 10.0 8.09.0 10.08.0 8.6 10.1 8.98.7 8.4 6.0 7.55.9 5.6 6.0 (1.0)5.0(1.0) 5.0 3.0 4.2 0.0 1.9 1.5 2.2 1.9 50.0 0.4 -1.0 26.0 30.0 30.0 13.0 21.0 30.0 32.0 27.0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 13.0 9.0 19.0 25.020.0 26.0 26.026.0 19.0 (2.0) 13.0 8.0 15.016.0 28.0 28.0 16.014.0 11.0 (10.0) 0.0 11.0 6.0 6.0 5.0 0.0 7.0 -13.0 11.011.0 (5.0)

-17.8

3Q12 1Q14 4Q16 2Q18 1Q21 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q17 2Q17 3Q17 4Q17 1Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 (20.0) 1Q12 (50.0) (58.0) (30.0) -32.5 (100.0) (40.0)

Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Adidas (Greater China) Overall

Source: Company data, CIRL

Exhibit 3: PS monthly sales gradually back to pre-COVID-19 level despite sales drop MoM in Apr due to recent Xinjiang issue

Exhibit 1: 500

Pork 450

products

400

sold in

350 supermark et300 counters

250

200

150

100

50

0

Source: Company data, CIRL

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Exhibit 4: Pou Sheng’s total store reduced by >700 in FY20 and mainly from direct operations PouExhibit Sheng's store 1: count FY19 FY20 **1Q19 **2Q19 **3Q19 **4Q19 **1Q20 **2Q20 **3Q20 **4Q20 **1Q21 Direct operation 5,883 5,240 5,733 5,895 5,995 5,883 5,882 5,597 5,391 5,240 5,170 PorkFranchised 3,950 3,835 3,660 3,756 3,869 3,950 3,860 3,839 3,901 3,835 3,837 productsTotal 9,833 9,075 9,393 9,651 9,864 9,833 9,742 9,436 9,292 9,075 9,007 Net adds 634 (758) 194 258 213 -31 -91 -306 -144 -217 -68 soldDirect stores' in growth 4.2% -10.9% 1.5% 2.8% 1.7% -1.9% 0.0% -4.8% -3.7% -2.8% -1.3% Franchised stores' growh 11.2% -2.9% 3.1% 2.6% 3.0% 2.1% -2.3% -0.5% 1.6% -1.7% 0.1% supermarketTotal growth 6.9% -7.7% 2.1% 2.7% 2.2% -0.3% -0.9% -3.1% -1.5% -2.3% -0.7% countersDirect stores (%) 59.8% 57.7% 61.0% 61.1% 60.8% 59.8% 60.4% 59.3% 58.0% 57.7% 57.4% Franchised stores (%) 40.2% 42.3% 39.0% 38.9% 39.2% 40.2% 39.6% 40.7% 42.0% 42.3% 42.6%

Source: Company data, CIRL (***1Q19-1Q21 growth rate are on QoQ basis)

Exhibit 5: Peers’ profitability comparison

Exhibit 1: bloomberg ROE (%) ROA (%) Net Gearing (%) FY20 code FY20A FY20A FY20A GM (%) OM (%) PM (%) Pork PRC - Sportswear /OEMs productsANTA SPORTS PROD 2020 HK 23.0 10.9 (13.8) 58% 26% 15% LI NING CO LTD 2331 HK 20.9 12.2 (69.9) 49% 15% 12% INTL 1368 HK 7.4 4.2 (15.2) 39% 12% 6% sold361 in DEGREES 1361 HK 5.9 3.2 (58.8) 38% 13% 8% HONMA GOLF LTD 6858 HK (2.8) (1.8) 0.8 51% 1% -3% supermarkYUE YUEN IND 551 HK N/A N/A #N/A N/A 22% 2% -1% Average 14.3 7.6 (31.4) 47% 13% 10% et counters

International - Sportswear peers NIKE INC -CL B NKE US 33.4 10.4 52.5 43% 8% 7% ADIDAS AG ADS GR 7.9 2.5 20.6 50% 4% 2% LULULEMON ATH LULU US 38.0 24.1 (18.1) 56% 22% 16% PUMA SE PUM GR 5.0 2.0 29.1 47% 4% 2% UNDER ARMO-C UA US (6.7) (2.6) 29.1 48% -14% -12% COLUMBIA SPORTSW COLM US 7.0 4.5 (20.4) 49% 5% 4% ASICS CORP 7936 JP (10.4) (4.5) 32.8 46% -1% -5% MIZUNO CORP 8022 JP 5.0 3.1 0.9 41% 4% 3% Average 12.6 7.2 15.8 48% 8% 5%

Sportswear distributors JD SPORTS FASHIO JD/ LN 33.4 11.4 121.2 47% 7% 4% TOPSPORTS INTERN 6110 HK 38.2 12.5 32.6 42% 10% 7% DICK'S SPORTING DKS US 18.1 6.1 175.0 29% 4% 3% FOOT LOCKER INC FL US 23.2 11.1 97.5 32% 8% 6% ABC-MART INC 2670 JP 11.5 10.0 (54.1) 53% 16% 11% FRASERS GROUP PL FRAS LN 6.9 2.5 77.3 42% 3% 2% ACCENT GROUP LTD AX1 AU 14.2 7.1 84.7 57% 11% 7% CALERES INC CAL US 15.3 4.6 182.6 41% 4% 2% GENESCO INC GCO US 9.4 4.4 116.8 48% 4% 3% Average 34.0 13.9 92.6 41% 9% 6%

Source: Bloomberg, CIRL

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Exhibit 6: Financial Summary IncomeExhibit statement 1: Cash flow Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E RevenuePork 3,933 3,709 4,488 5,199 6,121 Pre-tax profit 177 63 244 334 405 Gross profit (reported) 1,342 1,133 1,517 1,794 2,112 Taxes paid (36) (49) (54) (52) (62) EBITDAproducts 295 188 311 409 490 Depreciation & amortization 84 93 29 30 32 Depreciation 84 93 29 30 32 Associates & Others 74 87 94 99 119 EBITsold in 211 94 282 379 459 CFO bef. WC change 298 194 312 411 494 Net interest income (exp.) (35) (34) (41) (47) (56) Change in working cap 13 212 (266) (309) (413) Associatessupermark 0 2 2 2 2 Cashflow from operation 311 406 46 102 81 Exceptionals/others 0 0 0 0 0 CAPEX (117) (87) (91) (91) (91) Profitet counters before tax 177 63 244 334 405 Free cash flow 195 319 (45) 11 (10) Tax expenses (50) (17) (67) (91) (111) Dividends 0 0 0 0 0 Minority interest 7 2 2 2 2 Balance sheet adj. (196) 75 86 119 133 Net profit 120 44 176 241 293 Sharse issued 0 0 0 0 0 Dividends 0 0 0 0 0 Others 0 0 0 0 0 Diluted EPS (US$) 0.023 0.008 0.033 0.046 0.056 Net cash flow (2) 394 41 130 122 Net cash (debt) start (423) (424) (30) 11 141 Balance sheet Net cash (debt) at year-end -424 -30 11 141 263 Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E Cash & equiv 89 252 281 410 533 Ratios Trade receivables 433 487 574 665 783 Year to Dec (US$ Mn) FY19A FY20A FY21E FY22E FY23E Other receivables 0 0 0 0 0 Growth rate (%) Inventories 1,160 850 951 1,090 1,283 Revenue 14.9% -5.7% 21.0% 15.8% 17.7% Other current assets 5 3 3 3 3 EBITDA 32.6% -36.4% 65.8% 31.5% 19.9% Fixed assets 634 671 706 699 679 EBIT 44.8% -55.4% 199.6% 34.2% 21.0% Intangible assets 118 102 86 70 70 Net profit 47.3% -63.5% 299.8% 37.4% 21.4% Investment, associates etc 77 100 100 100 100 Fully diluted EPS 46.6% -63.5% 299.8% 37.4% 21.4% Total assets 2,516 2,465 2,701 3,037 3,451 Margins (%) Gross margin (reported) 34.1% 30.6% 33.8% 34.5% 34.5% Account payables 385 468 556 647 762 EBITDA 7.5% 5.1% 6.9% 7.9% 8.0% Other payables 129 152 152 152 152 EBIT 5.4% 2.5% 6.3% 7.3% 7.5% Short-term debt 513 282 270 270 270 Net margin 3.1% 1.2% 3.9% 4.6% 4.8% Other current liabs 98 112 112 112 112 Other ratios Long-term debts 0 0 0 0 0 ROE (%) 11.0% 3.9% 14.3% 16.7% 17.1% Deferred tax and others 276 311 292 292 292 ROA (%) 5.3% 1.8% 6.8% 8.4% 9.0% Other long-term liabs 0 0 0 0 0 Net gearing (%) 38.1% 2.6% -0.9% -9.0% -14.1% Total liabilities 1,401 1,325 1,380 1,472 1,586 Interest coverage (x) -6.1 -2.8 -6.9 -8.0 -8.2 Receivables days 43.1 45.2 43.1 43.5 43.2 Share capital 7 7 7 7 7 Payables days 54.2 66.4 68.3 69.4 69.4 Reserves 1,094 1,119 1,299 1,544 1,842 Inventory days 163.3 120.5 116.8 116.8 116.8 Shareholders' equity 1,101 1,125 1,305 1,551 1,849 Effective tax rate (%) -28.2% -27.3% -27.3% -27.3% -27.3% Minorities 14 15 15 15 15 Total equity 1,115 1,141 1,321 1,566 1,865 Net cash (debt) (424) (30) 11 141 263

Sources: Company Data, CIRL estimates

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Exhibit 7: Peers valuation comparison Exhibit 1: bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%) code (HKD mn) (HKD) 1M 3M YTD FY18A FY19A FY20A FY21E FY22E FY18A FY19A FY20A FY21E FY22E

PRCPork - Sportswear brands/OEMs PROD 2020 HK 378,196 139.90 (0.4) (3.7) 13.8 77.2 62.1 64.8 40.2 31.2 0.7% 0.5% 0.5% 0.9% 1.4% LIproducts NING CO LTD 2331 HK 162,847 65.30 13.0 22.3 22.5 185.9 92.9 83.8 55.7 43.0 0.2% 0.3% 0.4% 0.5% 0.7% XTEP INTL 1368 HK 17,856 6.81 12.6 90.8 76.0 31.4 19.0 19.5 29.1 20.8 3.0% 3.3% 2.3% 2.9% 3.6% 1361 HK 6,161 2.98 24.2 129.2 175.9 17.1 12.6 13.2 11.6 10.3 3.0% 3.1% 0.0% 1.8% 3.8% HONMAsold GOLF in LTD 6858 HK 2,495 4.12 (8.4) (36.8) (18.9) 9.0 8.4 -47.7 13.7 14.1 5.5% 5.9% 5.5% 4.7% 4.6% YUE YUEN IND 551 HK 30,503 18.92 (4.6) 6.3 17.2 12.8 13.0 -43.3 13.0 10.0 7.9% 5.9% 0.0% 4.8% 5.8% supermarkAverage 99,676 6.0 34.7 47.8 55.6 34.7 45.3 27.2 21.6 3.4% 3.2% 2.2% 2.6% 3.3% POUet SHENGcounters INTL 3813 HK 10,017 1.87 7.5 10.7 1.6 15.1 10.3 28.3 7.1 5.1 1.4% 0.0% 0.0% 0.0% 0.0% International - Sportswear peers NIKE INC -CL B NKE US 1,639,693 1,037.80 1.0 (6.0) (5.6) 111.5 51.9 81.6 42.7 33.7 0.6% 0.6% 0.7% 0.8% 0.9% ADIDAS AG ADS GR 533,019 2,659.56 2.2 (2.8) (4.9) 34.0 30.3 135.9 37.2 28.5 1.2% 0.0% 1.0% 1.1% 1.4% LULULEMON ATH LULU US 311,727 2,391.82 (4.7) (10.2) (11.5) 161.4 84.0 61.7 67.0 47.4 0.0% 0.0% 0.0% 0.0% 0.0% PUMA SE PUM GR 127,438 844.94 (1.0) 5.4 (2.4) 72.8 54.7 180.0 48.7 33.9 0.4% 0.0% 0.2% 0.6% 0.9% UNDER ARMO-C UA US 71,094 142.76 (0.3) (2.4) 23.5 - - - 59.3 38.7 0.0% 0.0% 0.0% 0.0% 0.0% COLUMBIA SPORTSW COLM US 53,507 805.17 (3.9) 1.9 18.6 26.7 21.1 63.7 23.4 20.1 0.9% 0.9% 0.3% 1.0% 1.1% ASICS CORP 7936 JP 29,313 154.38 20.7 9.7 10.0 -20.2 56.7 -24.1 74.7 34.6 1.1% 1.4% 1.1% 1.1% 1.2% MIZUNO CORP 8022 JP 4,207 158.28 0.3 (2.2) 11.1 11.6 9.4 12.1 -302.1 17.1 2.2% 2.2% 2.3% 2.3% 2.2% Average 161,472 1.9 (0.1) 6.3 69.7 44.0 89.2 50.4 31.8 1.2% 1.5% 1.0% 1.2% 1.4%

POU SHENG INTL 3813 HK 10,017 1.87 7.5 10.7 1.6 15.1 10.3 28.3 7.1 5.1 1.4% 0.0% 0.0% 0.0% 0.0%

Sportswear distributors JD SPORTS FASHIO JD/ LN 97,869 94.87 (6.6) 8.2 1.1 39.2 33.9 37.5 27.5 24.4 0.2% 0.2% 0.0% 0.1% 0.2% TOPSPORTS INTERN 6110 HK 71,934 11.60 11.5 (8.7) 0.0 - 9.9 25.2 23.7 19.0 0.0% 0.0% 1.8% 4.8% 2.8% DICK'S SPORTING DKS US 58,973 660.54 4.2 13.4 51.3 28.0 25.8 24.8 15.0 16.3 0.8% 1.1% 1.3% 1.5% 1.7% FOOT LOCKER INC FL US 49,512 479.40 5.3 18.4 52.6 27.6 13.1 13.5 23.4 13.2 2.0% 2.3% 2.5% 1.1% 1.9% ABC-MART INC 2670 JP 34,695 420.34 (2.3) (4.8) 3.3 16.7 16.1 16.3 28.1 20.8 2.2% 2.9% 2.9% 2.9% 2.9% FRASERS GROUP PL FRAS LN 32,855 63.32 15.1 29.3 28.6 159.4 28.7 34.6 33.0 21.8 0.0% 0.0% 0.0% 0.0% 0.0% ACCENT GROUP LTD AX1 AU 8,497 15.68 11.8 15.2 13.2 31.4 27.9 29.1 18.8 18.0 2.6% 3.2% 3.0% 4.5% 4.6% CALERES INC CAL US 7,281 189.99 5.0 57.2 56.3 12.0 -186.4 15.4 -17.0 15.4 1.1% 1.2% 1.2% 1.1% 1.1% GENESCO INC GCO US 6,065 405.54 4.4 19.8 73.5 -8.9 -19.3 13.1 -26.1 14.2 0.0% 0.0% 0.0% 0.0% 0.0% Average 40,853 5.4 16.4 31.1 44.9 22.2 23.3 24.2 17.3 1.5% 1.8% 1.8% 2.3% 2.2%

POU SHENG INTL 3813 HK 10,017 1.87 7.5 10.7 1.6 15.1 10.3 28.3 7.1 5.1 1.4% 0.0% 0.0% 0.0% 0.0%

Source: Bloomberg, CIRL (As of May 14 morning session close)

Exhibit 8: Pou Sheng’s 12 month Forward P/E Ratio

Exhibit25 1: 12 mths Forward P/E Ratio Pork avg. products20 sold in +1std. 15 supermark a et counters - 10 -1std.

5

0 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Source: Bloomberg, CIRL

R isk Factors

Downside risks include: 1) Longer than expected sales recovery from Nike and Adidas in Greater China; 2) longer than expected clear-up time for emerging brands’ inventory; 3) lengthened store closures 4) rising overheads ; 5) increasing competition from international and PRC peers, 6) slower than expected ramp up in

PCG Bro’s China business & 7) coporate governance issue.

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Rating Policy

Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected] Lewis Pang Associate Director (852) 2235 7847 [email protected] Edith Li Senior Research Analyst (852)2235 7515 [email protected] Farica Li Research Analyst (852) 2235 7617 [email protected]

Analyst Certification I, Hayman Chiu, Research Director of Cinda International Research Limited., hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International Research Limited cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so may contain uncertainty. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, and it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International Research Limited will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The whole or a part of this report should not be reproduced to others.

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