Next World (160550 KQ) to help cushion earnings

Media Descendants of the Sun off to a strong start Descendants of the Sun : ’s (NEW) first drama Update Descendants of the Sun has been drawing huge audiences since its simultaneous premiere in Korea (KBS) and (Baidu’s streaming site iQIYI). We believe the drama’s March 7, 2016 total production costs (W13bn for 16 episodes) will be fully recovered by the advance sales of airing rights and revenue from copyrights. The deal with iQIYI is believed to include incentives if the show exceeds a certain number of views, in addition to a fixed (Maintain) Trading Buy payment, suggesting additional profits may lie ahead.

Drama business: NEW’s drama business is in its infancy and its project lineup is not yet Target Price (12M, W) 16,000 decided. But we think chances are high the company will continue its drama business , given its ownership structure and need for content diversification. NEW’s second- Share Price (03/04/16, W) 14,000 largest shareholder is Huace Media (13.03% stake), China’s largest drama production company. NEW also has an 11% stake in the domestic drama studio Victory Production Expected Return 14% & Company, which is expected to book revenue from the dramas Goodbye Mr. Black (Wednesday/Thursday nights on MBC) and Monster (Monday/Tuesday nights on MBC) , which will start airing in March after last year’s delays. OP (15F, Wbn) -2 Consensus OP (15F, Wbn) 1 Key earnings variables: Dramas in 1H and tentpole films in 2H Dramas in 1H16: We believe 1H16 earnings will be drive n by TV dramas, rather than EPS Growth (15F, %) -76.4 films. We expect sluggish film earnings in 1Q16 due to remaining losses from the The Market EPS Growth (15F, %) 20.0 Tiger (released in late 2015) and losses from A Melody to Remember (released in P/E (15F, x) 287.8 January). The company, which began recognizing production revenue for Descendants Market P/E (15F, x) 11.5 of the Sun in 3Q15, should book the remaining production revenue, as well as revenue KOSDAQ 673.84 from copyright sales and incentives from iQIYI, in 1H16. The company’s remaining film lineup for 1H16 mostly consists of low-budget thrillers and dramas. Market Cap (Wbn) 384 Shares Outstanding (mn) 27 Films in 2H16: Most of the company’s highly anticipated films are set for release in Free Float (%) 61.8 2H16. Last year, NEW chose not to release any major films in the critical month of Foreign Ownership (%) 13.6 August, instead betting on the year-end holiday movie The Tiger . This year, however, Beta (12M) 1.64 the company plans to release a major title in each prime season . We expect the movie 52-Week Low 9,260 Busan Bound (starring Gong Yu) to serve as the company’s tentpole film for the summer, Pandora (starring Kim Myung-min) for the Chuseok holidays, and The King 52-Week High 15,376 (starring Jo In-sung and Jung Woo-sung) for the year-end holidays. The company is also (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M working on Chinese co-productions through its joint venture with Huace Media , and the Absolute 32.1 26.1 27.1 first of them (Witch ) could hit theaters as early as the end of the year. Relative 34.0 21.7 18.9 Retain Trading Buy and Cut TP to W16,000 150 Next Entertainment World KOSDAQ We maintain our Trading Buy call on NEW. Film investment losses have raised 130 uncertainty about the box-office performance of the company’s films, but the drama business ( Descendants of the Sun ) is providing a cushion against the weakness in films, 110 and has the potential to bring in additional profits. We are cutting our target price to

90 W16,000 (from W17,000), reflecting our earnings and multiple revisions. Our target price is based on a P/S ratio of 4x, the low end of the recent two-year range. 70 3.15 7.15 11.15 3.16

Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 43 122 54 76 82 89 [Telecom Service / Media] OP (Wbn) 5 20 6 -2 3 6

Jee-hyun Moon OP margin (%) 12.2 16.2 10.2 -2.2 3.2 6.2 +822-768-3615 NP (Wbn) 5 12 4 1 4 6 [email protected] EPS (W) 325 690 155 36 161 234 ROE (%) 40.5 62.6 5.6 0.8 3.5 4.8 Nu-ri Ha +822-768-4130 P/E (x) - - 58.4 287.8 86.8 59.9 [email protected] P/B (x) - - 2.0 2.3 2.9 2.8 Notes: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

March 7, 2016 Next Entertainment World

Key highlights

Figure 111.1. Descendants of the Sun isisis airingairingairing simultaneously on KBS and iQIYIiQIYIiQIYI

Source: KBS, iQIYI, KDB Daewoo Securities Research

Figure 222.2. Descendants of the Sun has much higher ratings than competitor programprogramssss airairairingair inginging at the same time

(%) 30 Descendants of the Sun SBS drama airing at same time 25 MBC drama airing at same time

20

15

10

5

0 1st episode (Feb. 24) 2nd episode (Feb. 25) 3rd episode (Mar. 2) 4th episode (Mar. 3)

Source: AGB Nielsen Korea, KDB Daewoo Securities Research

TableTableTable 111.1. NNNEW’NEW’EW’EW’ss expected 201620162016 film lineup Release date TitleTitleTitle Director CastCastCast Jan. 21 A Melody to Remember Lee Han Yim Si-wan, Go Ah-sung Mar. 3 No Tomorrow Lee Ji-seung Park Hyu-joo, Bae Sung-woo, Lee Hyun-wook Mar. 10 Waiting for You Mo Heung-jin Sim Eun-kyung, Yoon Je-moon Apr. Letter from Jail Kwon Jong-kwan Kim Myung-min, Kim Sang-ho, Kim Hyang Gi Apr. The Last Ride Nam Dae-joong Ryu Deok-hwan, Kim Dong-young, An Jae-hong May Because I Love Joo Ji-hong Cha Tae-hyun, Kim Yoo-jung, Sung Dong-il Jun. The Guru Show (tentative) Heo Jeong Yum Jung-ah Summer BusanBusanBusan Bound Yeon Sang-ho Gong Yu, Ma Dong-seok, Jung Yu-mi 2H Pandora Park Jeong-woo Kim Nam-gil, Kim Myung-min 2H Station Yeon Sang-ho Ryu Seung-ryong, Shim Eun-kyung, Lee Jun Undecided One Line (tentative) Yang Kyung-mo Yim Si-wan, Jun Goo, Lee Dong-hwi Undecided Lucid Dream Kim Joon-seong Ko Soo, Seol Gyung-goo, Kang Hye-jung Undecided The King Han Jae-lim Jo In-sung, Jung Woo-sung, Kim Ah-joong China co- Witch Leste Chen Not finalized (remake of Kang Full’s web-based cartoon) productions Beauty Inside Baek Jong-yeol Not finalized (Chinese version) (Huace & NEW JV) The Phone Not finalized Not finalized (Chinese version) Notes: Release dates are subject to change; Films with higher production costs are in bold Source: Company data, media reports, KDB Daewoo Securities Research

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March 7, 2016 Next Entertainment World

Earnings and forecasts

TableTableTable 222.2. Annual earnings (Wbn, %) 201220122012 201320132013 201420142014 201520152015P2015 PPP 2016F2016F2016F Revenue 43 122 54 76 82 Film 43 118 49 69 73 Domestic – Theater 43 104 38 57 57 distribution Domestic – IP 0 14 11 9 10 Exports 0 0 1 4 6 Performance - 4 5 - - Other 0 0 0 7 9 Operating profit 5 20 6 -2 3 OP margin 12.2 16.2 10.2 -2.2 3.2 Net profit 5 12 4 1 4 Net margin 11.8 9.9 7.8 1.3 5.4 YoYYoYYoY Revenue 182.6 -55.4 39.7 8.0

Film 174.9 -58.4 40.2 5.9

Performance 34.5 -100.0 0.0

Other -12.0 74.9 2580.3 28.8 Operating profit 276.8 -72.0 TTR TTB

Net profit 135.5 -64.8 -76.4 338.5

Major assumptions Admissions 23,304 39,005 15,990 17,469 17,644 (‘000 persons) The Grand Heist , Miracle in Cell No. 7 , The Attorney, Northern Limit Line , Busan Bound , Major titles All About My Wife New World Haemoo The Great Tiger Pandora Notes: All figures are based on non-consolidated K-IFRS; Performance business spun off after establishment of SHOW & NEW in May 2014; Other revenue includes revenue from drama productions; Revenue of individual business units is on a non-consolidated basis Source: Company data, FSS, KOFIC, KDB Daewoo Securities Research estimates

TableTableTable 333.3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. NotesNotesNotes 20202016F20 16F16F16F 20202017F20 17F17F17F 20202016F20 16F16F16F 20202017F20 17F17F17F 20202016F20 16F16F16F 20202017F20 17F17F17F Revenue 89 91 82 89 -7.9 -2.2 - Revised down estimated number of admissions - Revised up COGS to reflect upward trend in Operating profit 7 7 3 6 -57.1 -14.3 production cost s Net profit 9 9 4 6 -55.6 -33.3 EPS 318 310 161 234 -49.4 -24.5 OP margin 8.2 7.7 3.2 6.2 Net margin 10.1 9.9 5.4 7.2 Notes: All figures are based on non-consolidated K-IFRS. Source: KDB Daewoo Securities Research

Figure 333.3... 1Q1Q1Q161Q 161616 main lineuplineup:: A Melody to Remember andandand Figure 444.4... 201620162016 tttentpoletentpole filmfilmfilmsfilm sss:::: Busan Bound and Pandora Waiting for You

Source: Company data, KDB Daewoo Securities Research Source: Company data, media reports, KDB Daewoo Securities Research

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March 7, 2016 Next Entertainment World

Next Entertainment World (160550 KQ/Trading Buy/TP: W16,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 545454 767676 828282 898989 Current Assets 149149149 155155155 161161161 170170170 Cost of Sales 434343 717171 727272 767676 Cash and Cash Equivalents 104 73 73 74 Gross Profit 111111 555 101010 131313 AR & Other Receivables 6 8 9 9 SG&A Expenses 666 777 777 888 Inventories 0 0 0 0 Operating Profit (Adj) 666 ---2-222 333 666 Other Current Assets 39 74 80 87 Operating Profit 666 ---2-222 333 666 NonNonNon-Non ---CurrentCurrent Assets 252525 343434 363636 393939 NonNonNon-Non ---OperatingOperating Profit 333 333 444 444 Investments in Associates 9 13 14 15 Net Financial Income 0 0 0 0 Property, Plant and Equipment 1 1 0 0 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 1 1 1 1 Pretax Profit 9 1 7 10 Total Assets 174174174 189189189 197197197 208208208 Income Tax 4 0 2 3 Current Liabilities 484848 626262 666666 717171 Profit from Continuing Operations 4 1 4 6 AP & Other Payables 6 9 9 10 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 12 12 12 12 Net Profit 4 1 4 6 Other Current Liabilities 30 42 45 49 Controlling Interests 4 1 4 6 NonNonNon-Non ---CurrentCurrent Liabilities 111 111 111 111 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 1 1 1 1 Total Comprehensive Profit 444 111 444 666 Other Non-Current Liabilities 0 0 0 0 Controlling Interests 4 1 4 6 Total Liabilities 494949 636363 676767 727272 Non-Controlling Interests 0 0 0 0 Controlling Interests 125125125 126126126 130130130 137137137 EBITDA 6 -2 3 6 Capital Stock 7 7 7 7 FCF (Free Cash Flow) -8 -24 0 1 Capital Surplus 93 93 93 93 EBITDA Margin (%) 10.5 -2.0 3.4 6.4 Retained Earnings 24 25 30 36 Operating Profit Margin (%) 10.2 -2.2 3.2 6.2 NonNonNon-Non ---ControllingControlling Interests 000 000 000 000 Net Profit Margin (%) 7.8 1.3 5.4 7.2 Stockholders' Equity 125125125 126126126 130130130 137137137

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities -7 -24 0 1 P/E (x) 58.4 287.8 86.8 59.9 Net Profit 4 1 4 6 P/CF (x) 45.5 - 91.2 53.2 Non-Cash Income and Expense 1 -2 0 1 P/B (x) 2.0 2.3 2.9 2.8 Depreciation 0 0 0 0 EV/EBITDA (x) 25.7 - 116.2 56.8 Amortization 0 0 0 0 EPS (W) 155 36 161 234 Others 1 -3 0 1 CFPS (W) 199 -54 154 263 Chg in Working Capital -6 -23 -3 -3 BPS (W) 4,554 4,591 4,752 4,986 Chg in AR & Other Receivables 21 -2 -1 -1 DPS (W) 0 0 0 0 Chg in Inventories 0 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -18 0 0 0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid ---7 -777 000 ---2-222 ---3-333 Revenue Growth (%) -55.4 39.7 8.0 8.4 Cash Flows from Inv Activities -2 -3 1 1 EBITDA Growth (%) -71.2 - - 103.9 Chg in PP&E -1 0 0 0 Operating Profit Growth (%) -72.0 - - 111.5 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -77.5 -76.8 347.2 45.3 Chg in Financial Assets -4 -5 -2 -2 Accounts Receivable Turnover (x) 3.4 11.2 10.0 10.0 Others 333 333 333 333 Inventory Turnover (x) 0.0 0.0 0.0 0.0 Cash Flows from Fin Activities 81 0 0 0 Accounts Payable Turnover (x) 10.1 51.6 43.4 42.0 Chg in Financial Liabilities - - - - ROA (%) 3.0 0.6 2.3 3.2 Chg in Equity 94 0 0 0 ROE (%) 5.6 0.8 3.5 4.8 Dividends Paid 0 0 0 0 ROIC (%) 41.2 -7.8 5.0 9.8 Others ------Liability to Equity Ratio (%) 39.1 50.2 51.6 52.5 Increase (Decrease) in Cash 72 -31 -1 1 Current Ratio (%) 309.8 249.0 243.0 239.0 Beginning Balance 33 104 73 73 Net Debt to Equity Ratio (%) -73.3 -48.1 -46.1 -44.5 Ending Balance 104104104 737373 737373 747474 Interest Coverage Ratio (x) 12.5 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates

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March 7, 2016 Next Entertainment World

APPENDIX 1

Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History

Company (Code) DateDateDate RatingRatingRating Target Price (W) Next Entertainment World Next Entertainment World(160550) 03/06/2016 Trading Buy 16,000 40,000 08/16/2015 Trading Buy 17,000 07/26/2015 Trading Buy 16,000 30,000

20,000

10,000

0 Mar 14 Mar 15 Mar 16

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price ( ▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution BuyBuyBuy Trading Buy HoldHoldHold SellSellSell 71.08% 11.76% 17.16% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2015)

Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the . If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

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March 7, 2016 Next Entertainment World

banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. : This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. : This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor

Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,

Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.

Chaoyang District, Beijing 100022 Ulaanbaatar 14240 Jendral Sudirman Kav. 52-53, Jakarta Selatan China Mongolia Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140

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