Singapore Company Focus

China Merchant Hldgs (Pacific)

Bloomberg: CMH SP

Reuters: CAEP.SI

DBS Group Research . Equity

8 Aug 2012

BUY S$0.72 STI : 3,067.74

Price Target : 12-Month S$ 1.09 (Prev S$ 1.12) Reason for Report : Acquisition of another toll road and results Potential Catalyst: Earnings execution and delivery DBSV vs Consensus: We were the first broker to cover the stock. Analyst Paul YONG CFA +65 6398 7951 paulyong@dbsvickers.com

Another solid acquisition

Acquires 51km Ningbo-Beilun Port Expressway in Zhejiang province for Rmb890m Potential FY13 EPS accretion of 10% if the deal is funded by debt; company remains committed to payout of 5.5Scts per annum 2Q12 earnings grew by 52% y-o-y to HK$109m, interim dividend of 2.75Scts proposed Maintain BUY with DCF-based TP of S$1.09 Acquires Ningbo-Beilun Port Eway for Rmb890m. CMHP announced that it is acquiring Ningbo-Beilun Port Expressway, located in Zhejiang province, for Rmb890m, which also includes taking on c. Rmb1.2bn debt. This 51km expressway reported net earnings of c. Rmb88m in 2011 and its concession runs until 2023. The acquisition price represents a PE of 10x, which is fair in our opinion, given the concession length. Based on the independent valuation reports, the IRR is >13%. EPS accretion of 9.6% if deal is 100% debt funded. Assuming the acquisition is fully funded by debt, EPS will be boosted by 9.6%, but would raise Group net debt to equity ratio to 56%. If CMHP does raise new equity, the EPS accretion would be less but leaves the Group with more debt-funded headroom for potentially more acquisitions (see inside for discussion). Firm 2Q12 results; 2.75Scts dividend proposed. Boosted by contribution from Yongtaiwen, CMHPs net earnings rose by 54% y-o-y in 2Q12 to HK$110m and underlined its commitment to its plan to pay at least 5.5Scts dividend per year by declaring an interim DPS of 2.75Scts. Maintain BUY, TP S$1.09. Our TP has been adjusted to take into account the recently announced waiver of toll fees during public holidays in China and this acquisition. The stock is trading at an attractive dividend yield of 7.5%, and just over 7x core FY12F earnings.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders China Merchants Group (%) Free Float (%) Avg. Daily Vol.(000)

Price Relative
S$ 0 .8 0 .8 0 .7 0 .7 0 .6 0 .6 0 .5 0 .5 0 .4 0 .4 0 .3 A u g -0 8 A u g -0 9 A u g -1 0 A u g -1 1 R e la t iv e In d e x 213 193 173 153 133 113 93 73 53 A u g -1 2

C h in a M e r c h a n t H ld g s ( P a c if ic ) ( L H S )

R e la t iv e S T I IN D E X ( R H S )

Forecasts and Valuation

FY Dec (HK$ m) 2010A 2011A 2012F 2013F

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

131 245 281 261 220 5.8 4.9 15 (49) 4.2 3.9 74.0 12.4 14.7 nm 8.2 5.5 1.0 CASH 6.7

847 736 538 314 314 7.0 7.0 20 43 6.0 5.5 78.2 10.3 10.3 8.4 10.1 7.6 0.9 0.3 7.7

1,548 1,298 1,158 719 450 16.0 10.0 129 43 8.5 5.5 87.1 4.5 7.2 8.0 7.4 7.6 0.8 0.5 16.3 (4.9) 9.6 S: 0

2,040 1,627 973 521 521 11.6 11.6 (28) 16 9.9 6.0 92.3 6.2 6.2 3.3 5.5 8.3 0.8 0.4 10.9 1.9 9.8 H: 0

B: 1

ICB Industry : Industrials ICB Sector: Industrial Transportation Principal Business: Owns and operates toll roads in various provinces in China.

718 517 / 416 82.6 17.4 46

Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: JC

Company Focus China Merchant Hldgs (Pacific)

Details of the acquisition CMHP announced that it will be buying the concession rights of 51km Ningbo-Beilun Port Expressway (Daqi-Xiwu section), located in Zhejiang province, for a consideration of Rmb890m; the price is subject to change depending on the final expiry date of the concession, which still requires approval from the relevant Zhejiang government authorities. The seller is China Ping An Life Insurance (Holdings). An EGM will need to be convened and completion is expected in 4Q12. The price of Rmb890m is based on the concession expiring on 31 Dec 2023, and either a refund or top-up will be required depending on the final approved concession expiry date, which could be up to 2027. The amount to be refunded (by the seller to CMHP if the expiry date is before 2023) or topped up (paid by CMHP to the seller) if the expiry date is after 31 Dec 2023, is Rmb100m per annum (pro-rated fractionally on number of days based on difference with 31 Dec 2023). If the expiry date is before 31 Dec 2019, the seller will refund Rmb400m to CMH. Ningbo-Beilun Port Expressway

Ningbo-Beilun Port Eway financials at a glance Rmb m Revenue Gross Profit PBT Net Profit NAV Traffic Volume 2011 347.9 188.9 115.6 87.8 314.7 20.8m vehicles

Source: Company Announcement

Based on Ningbo-Beilun Port Expressways 2011 financials, the acquisition price paid by CMHP represents 10.1x PE, 8.1x EV/EBITDA and 2.8x P/NAV. Whilst the remaining concession period of 11 years or so is rather short, the road is already fairly mature and profitable (with a high cash yield), hence we see the acquisition price as fair. Based on the traffic and revenue forecast study (THI Asia Consultants) and valuation report (Savills), both of which are independent, the estimated acquisition IRR of this asset is over 13%. (The appraised value of the project is RMB920m based on a discount rate of 13%). Revenue and earnings impact Earnings accretion assuming 100% debt funding RMB m Net Profit before adjustments Less: Adjustments Interest Cost Concession rights amortisation Accretion to CMHP net profit
Source: DBS Vickers Estimates

2013F 88.0 22.3 28.7 37.1

Source: Company Presentation

Besides adding some Rmb350m to the Groups topline, we estimate that this transaction will add about 9.6% to CMHPs net earnings in 2013. This is assuming that the deal consideration of Rmb890m is entirely funded by debt. There is also an additional adjustment for the amortisation (over the life of the asset) of the premium paid over the NAV of the asset (as concession rights using units of usage methodology). This additional concession rights amortisation adjustment is a non-cash item, and it is also non tax-deductible.

This expressway is a dual-2 lane expressway and comprises of 2 sections: a) Beilun Port Toll Station to Dazhujia (30.4km) and b) Ningbo East Toll Station to Jiangshan Toll Station (21km).

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Company Focus China Merchant Hldgs (Pacific)

Balance Sheet impact and funding options CMHP has stated that it intends to finance the acquisition using a combination of internal cash resources and external financing, including external bank borrowings and/or the issuance of new shares. For our forecast, we have assumed that the RMB890m consideration is entirely funded by debt, which will take the Groups 2012F net debt to equity ratio to 56% (assuming the deal is completed by end 2012) from our previous projection of 17%. Without this acquisition, CMHPs estimated net profit for 2013 is HK$481.6m and fully diluted EPS of HK$0.564 (after we lower our estimates to factor in the recently announced waiver of toll fees during major public holidays).

Although we see potential equity fund raising as independent of this acquisition, we illustrate in the table below the impact on EPS and the Groups balance sheet assuming different levels of equity fund raising for this transaction. The scenario analysis is based on an acquisition price of Rmb890m for the asset, debt cost of 2.5% (short-term loans) and a new share issue price of S$0.84 (just above the Groups NAV per share as at end 1Q12). EPS calculations are fully diluted, and include the outstanding 135.8m RCPS. Net gearing is calculated based on net debt over total shareholders equity (including minority interest).

Funding scenario analysis impact on earnings and balance sheet 2013F 100% Debt 75% Debt 25% Equity 50% Debt 50% Equity 25% Debt 75% Equity 100% Equity
Source: DBS Vickers

PATMI HK$m 527.6 534.4 541.2 548.0 554.8

% Chg 9.6% 11.0% 12.4% 13.8% 15.2%

FD EPS (HK$) 0.618 0.589 0.564 0.541 0.520

% Chg 9.6% 4.5% 0.0% -4.1% -7.7%

Net Gearing 55.7% 50.0% 44.7% 39.8% 35.2%

Dividends and payout ratio We believe this acquisition does not impact the Groups commitment to pay annual dividends of at least 5.5Scts. Even if all the outstanding RCPS were converted and this transaction was entirely funded by the issuance of 211m new shares, CMHPs payout ratio in 2013 based on DPS of 5.5Scts works out to be 65%, which is very manageable for CMHP. In fact, one can argue that there is room for CMHP to pay more than 5.5Scts dividends (we project 6Scts dividend in 2013). Dividend Payout Ratio FY13 - 5.5Scts dividend Basic Shares (718.4m) If all RCPS converted (135.8m) Plus 211m new shares
Source: Company

Payout Ratio 46.4% 55.2% 65.5%

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Company Focus China Merchant Hldgs (Pacific)

Valuation Taking into account the waiver of toll fees for major public holidays, our TP for CMHP reduces to S$1.05 (from S$1.12 previously). The Ningbo-Beilun Port Expressway acquisition adds about 4Scts to our target price, hence our TP for CMHP is S$1.09. This is based on DCF methodology with a WACC of 9.7%. Our TP of S$1.09 translates to FY13 PE of 9.3x and dividend yield of 5.5%.

Besides offering an attractive acquisition story, the stock is trading at undemanding valuations of 7.3x FY12 PE, declining to 6.3x FY13 PE, with an attractive prospective dividend yield of 7.6%, which is the highest amongst HK-listed peers (with the exception of Hopewell Highway, which is paying out 100% of earnings but is also facing an earnings decline in 2013).

China Toll Roads Peer Valuations (Based on 6th August Closing Prices)
Mkt Price Company Name Jiangsu Expressway Zhejiang Expressway Sichuan Expressway Hopewell Highway Shenzhen Expressway Anhui Expressway Yuexiu Transport CMHP Lcl $ 7.10 5.48 2.32 3.71 2.80 3.49 3.69 0.725 Cap US$m 4,177 3,058 1,425 1,432 1,073 945 796 419 Dec Dec Dec Dec Dec Dec Dec Dec FYE 12F 12.2 11.1 4.8 11.2 6.7 6.3 9.3 7.3 PE (x) 13F 11.4 12.3 5.4 14.6 6.2 6.3 8.3 6.3 12F 5.5 6.1 4.0 8.6 5.4 5.9 6.0 7.6 Net Yield (%) 13F 5.9 5.5 3.5 6.6 5.8 5.9 6.8 8.3 P/B (x) 12F 1.68 1.26 0.57 1.25 0.52 0.70 0.62 0.83 13F 1.61 1.24 0.52 1.25 0.50 0.66 0.60 0.79 ROE (%) 12F 13.5 11.5 12.4 11.1 8.0 11.5 6.8 10.5 13F 14.3 10.1 10.1 8.6 8.2 10.8 7.4 10.7 FY12 Payout % 75% 75% 21% 96% 40% 41% 59% 54%

Source: Bloomberg, DBS Vickers

CMHPs Toll Road Portfolio at a glance Length Road Portfolio Yongtaiwen E'way Guiliu Expressway Guihuang Highway Ningbo-Beilun Port E'way
Source: Company, DBS Vickers

Equity Interest 51% 40% 60% 100%

Concession Ends Sep-30 2025 2027 2023

2011 (Rmb m) Revenue 1136 471 218 348 PAT 380.0 80.4 110.2 88.0 Comments PAT at company level Contribution to CMHP Contribution to CMHP PAT at company level

(km) 138 139 39 51

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Company Focus China Merchant Hldgs (Pacific)

2Q12 Results Commentary CMHPs 2Q12 earnings were largely in line with our expectations, except for lower than expected contribution from Guihuang Highway, due to the diversion of some traffic on the complete opening of a competing parallel road. Otherwise maiden contribution by Yongtaiwen Expressway during the quarter helped boost net earnings growth by 54% y-o-y to HK$110m. As at halftime, the Groups net earnings are up by 91% yo-y to HK$222m.

The Groups balance sheet remains firm and indeed, CMHP has already started paying down its loans (used to finance the acquisition of Yongtaiwen Expressway) and its net gearing has improved from 0.25x as at the end of 2011 to just 0.14x as at the end of 1H12.

Results Summary
FYE Dec (HK$ m) Revenue Cost of Sales Gross Profit Distribution Expenses Administrative Expenses Other Operating Expenses Other Operating Income Operating Profit Finance Costs Subsidy Income Share of results of JVs Exceptional Gains/(Losses) Profit Before Tax Tax Profit After Tax MI PATMI Net Profit by Toll Road (HK$m) Guiliu Expressway Guihuang Highway Yuyaho Highway Yongtaiwen Expressway Other expenses Total 1Q11 14.1 (13.0) 1.1 (1.2) (9.0) (0.0) 4.2 (5.0) (1.0) 4.3 49.3 0.0 47.6 (2.7) 44.9 0.0 44.9 2Q11 18.4 (14.5) 3.9 (1.4) (9.0) (0.8) 0.0 (7.3) (0.4) 4.3 79.0 0.0 75.6 (4.1) 71.5 0.0 71.5 1Q12 370.1 (152.8) 217.3 (1.9) (16.4) (0.0) 5.7 204.6 (35.8) 4.4 55.1 0.0 228.3 (48.8) 179.5 (67.3) 112.2 2Q12 393.7 (170.2) 223.5 (2.7) (16.4) 0.0 6.0 210.4 (31.8) 4.3 52.1 0.0 235.0 (52.3) 182.73 (72.5) 110.2 y-o-y 2044% 1077% 5632% 98% 81% NM NM 2982% 7132% 1% -34% NM 211% 1176% 156% NM 54% 1H11 32.5 (27.5) 5.0 (2.6) (18.0) (0.8) 4.2 (12.3) (1.5) 8.6 128.3 0.0 123.2 (6.8) 116.4 0.0 116.4 1H12 763.8 (323.0) 440.8 (4.7) (32.8) (0.0) 11.7 415.0 (67.6) 8.7 107.2 0.0 463.4 (101.1) 362.2 (139.9) 222.4 y-o-y 2252% 1076% 8690% 79% 82% -94% 182% 3486% 4521% 1% -16% NM 276% 1387% 211% NM 91% Comments Consolidation of Yongtaiwen

Higher debt from Yongtaiwen Lower contribution from Guihuang Eway

49% non controlling interests in Yongtaiwen Largely in line

18.4 30.1 5.1

28.3 47.3 7.7

28.0 31.5

26.1 30.4

-8% -36% NM NM -19% 67%

46.7 77.4 12.8 0.0 (14.5) 122.4

54.1 61.8 0.0 145.6 (12.5) 249.0

16% -20% NM NM -14% 103% Lower revenue from lower traffic due to diversion on opening of parallel road Slated for sale th Acquisition completed on 6 July 2011

(6.3) 47.3

(8.2) 75.1

70.1 (5.9) 123.6

75.5 (6.6) 125.3

Source: Company, DBS Vickers

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Company Focus China Merchant Hldgs (Pacific)

Income Statement (HK$ m)

FY Dec 2009A 2010A 2011A 2012F 2013F

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

211 (174) 37 (19) 18 68 290 (4) (168) 203 (8) 0 (11) 184 352 377 (0.5) 19.3 13.9 (35.4) 17.4 8.4 87.4 4.9 4.7 0.4 87.5 4.1

131 (114) 17 (25) (8) 16 236 (4) 41 281 (14) 0 (6) 261 220 245 (38.0) (34.9) (143.0) 41.9 13.0 (5.8) 200.1 6.7 6.5 (0.2) 67.7 (1.7)

847 (464) 383 (53) 331 17 252 (62) 0 538 (97) (122) (6) 314 314 736 548.9 200.1 (4,454.8) 20.0 45.3 39.0 37.0 7.7 4.0 3.8 78.1 5.3

1,548 (676) 872 (81) 792 17 220 (141) 270 1,158 (169) (263) (6) 719 450 1,298 82.7 76.3 139.4 129.3 56.3 51.1 46.4 16.3 5.7 5.7 34.1 5.6

2,040 (946) 1,094 (110) 984 19 227 (257) 0 973 (174) (271) (6) 521 521 1,627 31.7 25.3 24.3 (27.5) 53.6 48.2 25.6 10.9 3.7 6.0 51.3 3.8

Yongtaiwen Eway revenue contribution from 2H11 onwards. Ningbo-Beilun Port Eway revenue from 2013 onwards.

FY12: Estimated gain from of Yuyao Highway

49% non controlling interests in Yongtaiwen Eway

Margins Trend
193.0%

143.0%

Source: Company, DBS Vickers

93.0%

43.0%

-7.0% 2009A 2010A 2011A 2012F 2013F

Operating Margin % Net Income Margin %

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Company Focus China Merchant Hldgs (Pacific)

Balance Sheet (HK$ m)
FY Dec 2009A 2010A 2011A 2012F 2013F

Asset Breakdown (2011)

Debtors 5.2% Net Fixed Assets 4.3%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

14 2,438 14 1,012 0 73 454 4,006 28 139 0 22 3,817 0 4,006 388 984 147.1 210.4 N/A 0.1 9.2 6.5 CASH (0.3) 0.0 NA

14 2,366 13 1,282 0 22 396 4,093 66 69 0 12 3,946 0 4,093 350 1,216 133.4 275.5 N/A 0.0 12.6 9.7 CASH (0.3) 1.3 8.0

176 2,165 7,081 1,505 0 211 389 11,528 664 1,320 2,519 365 4,171 2,488 11,528 (719) (1,678) 50.2 506.2 N/A 0.1 1.1 0.9 0.3 0.0 0.3 0.7

168 1,882 9,449 1,976 0 30 389 13,895 2,136 504 3,757 365 4,646 2,488 13,895 (85) (3,917) 28.4 403.9 N/A 0.1 0.9 0.8 0.5 0.8 0.0 1.2

161 1,882 9,062 2,401 0 38 389 13,932 1,886 514 3,757 365 4,922 2,488 13,932 (88) (3,242) 6.0 31.5 N/A 0.1 1.2 1.0 0.4 0.7 0.0 1.3

Bank, Cash and Liquid Assets 37.1%

Assocs'/JVs 53.4%

More debt taken on at both company levels of Yongtaiwen and NingboBeilun Port Eways, as well as at holding company level to fund the acquisitions of these companies.

Cash Flow Statement (HK$ m)

FY Dec 2009A 2010A 2011A 2012F 2013F

Capital Expenditure
10 9 8 7 6 5 4 3 2 1 0 2010A 2011A 2012F 2013F

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (HK cts) Free CFPS (HK cts)

203 1 (14) (290) 39 146 85 0 106 0 221 0 327 (152) (26) 0 0 (178) 3 238 7.9 14.6

281 1 0 (236) (35) (33) (21) (1) 133 0 285 0 418 (177) 32 0 0 (145) 19 270 1.9 (3.1)

538 136 (14) (252) (22) 0 386 (9) (1,567) 107 275 0 (1,193) (318) 1,317 0 0 1,000 30 223 56.8 52.5

1,158 269 (169) (220) (635) 0 403 (2) (1,086) 282 220 0 (586) (515) 1,086 0 0 571 0 389 144.5 55.9

973 398 (174) (227) 3 0 972 (2) 0 0 227 0 225 (522) (250) 0 0 (772) 0 425 134.9 135.1

Capital Expenditure (-)

Dividends from JV companies Guiliu Eway and Guihuang Highway

Source: Company, DBS Vickers

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Company Focus China Merchant Hldgs (Pacific)

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 8 Aug 2012, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

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Company Focus China Merchant Hldgs (Pacific)

COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 06-Aug-2012 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 8 Aug 2012. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the company mentioned. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

3.

ii.

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