17 April 2015 Update | Sector: Real Estate Phoenix Mills BSE Sensex 28,442 S&P CNX 8,606 CMP: INR375 TP: INR455 (+21%) Buy Strong consumption trends entail rental headroom Dev Co’s success - key to further growth capital Stock Info Bloomberg n PHNX IN Equity Shares (m) 144.8 M.Cap. (INR b) / (USD b) 54.3/0.9 52-Week Range (INR) 416/236 1, 6, 12 Rel. Per (%) 1/-4/23 Avg Val (INRm)/Vol ‘000 34/97 Free float (%) 34.1 Financial Snapshot (INR Billion) Y/E Mar 2015E 2016E 2017E Net Sales 17.3 22.9 25.9 EBITDA 8.2 11.0 12.1 Adj PAT 1.3 3.0 3.4 EPS (INR) 8.8 EPS Gr. (%) BV/Sh (INR) 20.4 23.7 -1.1 132. 15.9 7 125.4 143.5 163.7 RoE (%) 7.0 14.2 14.5 RoCE (%) 12.1 16.4 18.2 P/E (x) 42.8 18.4 15.9 3.0 2.6 2.3 P/BV (x) Shareholding Pattern (%) As on Promoter DII FII Others n Dec-14 Sep-14 Dec-13 66.0 66.0 65.9 4.2 4.2 4.6 23.6 6.3 23.0 6.9 22.3 7.1 Notes: FII incl. depository receipts Stock Performance (1-year) n n Consumption continues to outpace rentals - growth headroom intact at malls. E-tailing advent is distant for best in class retail assets of Phoenix Mills (PHNX); no major risk to 2x rental growth by FY19E led by renewals and stake increases. Next leg of growth capital hinges on Dev Co’s success, where significant value unlocking is awaited. Scale-up with launch cycle is gaining traction. PHNX has underperformed the realty index, largely led by concern on its retail specific risk, which is distant and unlikely to impact our base case growth assumptions. We value PHNX based on SOTP of INR455/share. Maintain Buy. Consumption continues to outpace rentals – growth headroom intact PHNX’s five key malls have been posting 15-40% YoY growth in consumption (average ~28%) and trading density (average ~22%) over the past 12-18 months. During this period, rental income recorded 13-16% YoY growth. Rentals as a percentage of consumption across malls have declined 2-6pp over the past five to six quarters (at 10-12%). Thus, headroom for re-rating of rentals remains intact in the upcoming renewals over FY16-19. Incremental leasing for marginal retailers at market city malls is taking place at 30-50% higher rentals than the existing average. E-tailing advent distant for best assets; no major risk to 2x rental scale-up Around 15-25% of the mall area comprises of supermarkets/hypermarkets along with electronics, mid-end apparel segments etc which are the showcase products of e-commerce players. PHNX believes that the advent of online stores is some distance away for market leader and best in class retail assets like HSP and market city malls. This is validated by steady consumption growth at malls so far. Adjusted for increased effective stakes, PHNX to post ~17% rentals CAGR over FY15E-19E to INR9.8b in FY19E (v/s 2x of INR4.9b in FY15E). Of the incremental rentals of ~INR5b, ~25% is attributable to stake increase and rest for renewals. Significant value unlocking from Dev Co to aid next leg of growth capital Currently, rentals from operating malls less the interest outgo is cash break-even, with added outflow for stake increases. Thus, benefits of surplus cash (yet to percolate) are expected as rentals grow and monetization cycle accelerates in Dev Co (only 33% of its 7.5msf assets monetized so far). We estimate ~INR35b (7580% is attributable to PHNX) of net cash flow from Dev Co over the next three to five years. Launch cycle is gaining traction along with potential recovery in demand scenario. Success of Dev Co monetization would be key to pursue growth and balance sheet health (by deleveraging) together, while equity capital (REIT) remains a secondary option. Sandipan Pal ([email protected]); +91 22 3982 5436 Anchit Agarwal ([email protected]); +91 22 3010 2397 Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Phoenix Mills Consumption continues to outpace rentals – growth headroom intact Rental income recorded 1316% YoY growth v/s consumption growth of ~28%, aiding no major risk to rental re-pricing scheduled ahead n n n n Incremental leasing for marginal retailers at market city malls is taking place at 30-50% higher rentals than the existing average n n PHNX’s five key malls (High Street Phoenix - HSP and four Market City malls) have been posting 15-40% YoY growth in consumption (average ~28%) and trading density (average ~22%) over the past 12-18 months. During this period, rental income recorded 13-16% YoY growth. Rentals as a percentage of consumption across malls have declined 2-6pp over the past five to six quarters (since stabilization of all malls). Barring Kurla (Mumbai), the figures are hovering around 10-12% in market city malls (while Kurla at ~19%) and ~15% at HSP. Thus, with consumption growth outpacing rentals, headroom for re-rating of rentals remains strong in the upcoming re-pricing schedules over FY16-19. Of its 5msf of retail assets (~4.7msf leased out), ~36%/65% of area will come for rentals renewal by FY17/19 (largely 10-20% annually over FY16-19). We expect no major risk to successful renegotiation. Much of PHNX’s existing rentals in market city malls were signed in the stressed economic period (FY09-12) and at pre-leasing stage of malls. Thus, with the macro outlook improving and revenue sharing threshold triggering in most assets, we expect, no downside risk to our current rentals CAGR estimate of ~10% (FY15E-17E) and ~14% (FY15E-19E). Incremental leasing at market city malls are taking place at INR120-130/sqft/m (v/s current rental INR85-90/sqft/m) at Pune/Kurla/Bangalore, and of INR170180/sqft/m in Chennai mall (v/s current rental INR105/sqft/m). Management expects to achieve 15-25% uptick in renewals. Exhibit 1: Consumption growth of ~28% YoY (post initial stabilization of all malls) 8,614 3,956 8,170 3QFY15 2QFY15 3,575 7,036 6,300 4QFY14 3,400 1QFY15 3,300 6,323 6,067 2QFY14 3,280 3QFY14 3,511 5,362 3,793 4QFY13 3,140 Market City Malls (INR m) 1QFY14 3,023 3,164 3QFY13 3,160 896 1QFY13 2,580 2QFY13 2,820 2,583 824 4QFY12 2,690 HSP (INR m) Source: Company, MOSL Exhibit 2: Ex-Kurla mall, rentals as % of consumption declined 2-6pp in past 5-6 quarters Rentals as percentage of consumption across malls are hovering around 1012% in market city malls (ex-Kurla at ~19%) and ~15% at HSP Chennai HSP Pune Kurla (Mumbai) Bangalore 24% 19% 14% 9% 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 Source: Company, MOSL 17 April 2015 2 Phoenix Mills Exhibit 3: Almost 65% of PHNX’s occupied area is slated for renewal over FY16-19 (msf) ~36%/65% of the area will come for rentals renewal over FY17/19 (largely 1020% annually over FY16-19) 4.71 Total Area HSP Pune Kurla Bangalore Chennai 0.92 0.97 0.41 1.07 0.87 1.14 1.68 0.63 0.93 0.81 Total Area Renewed till FY15 FY16 FY17 FY18 FY19 Source: Company, MOSL E-tailing advent is distant for best-in-class assets of PHNX n n n Electronics, apparels and consumer durables are the key segments seeing major penetration by e-tailing players Around 15-25% of the mall area comprises of supermarkets/hypermarkets along with electronics, mid-end apparel segments etc which are the showcase products of e-commerce players. PHNX believes that the advent of online stores to mall culture is some distance away for the market leader and best assets like HSP and market city malls. This is validated by steady consumption growth at malls so far. Interestingly, company may exploit the online opportunity in future by leveraging its brand name and relationships with retailers. Exhibit 4: E-tailing market segmentation: Electronics lead by value Home Furnishings Jewellery 3% 4% Books Others 3% E-Tail Market Segmentation CY12 (%) Laptops/Tablets 25% 4% Consumer Durables 8% Cameras 14% Mobile Phones 19% Apparels 21% Source: MOSL, IAMAI Effective rentals to grow 2x on stake acquisitions and renewals n n n n 17 April 2015 With matured and strong performing assets in place, PHNX’s rental income growth will be driven by (a) ability to renegotiate rentals and (b) continuous increase in stakes in these assets. We factor rental CAGR of ~14% for the 4.7msqft of occupied retail portfolio (assuming 5% recurring vacancy) over FY15E-19E, on the back of 10-20% revision assumptions in rentals during the upcoming renewal schedule. PHNX’s stakes in key market city malls are slated to increase by 20-25% during this period, translating into effective stake in 5msqft (ex-Phoenix Palladium Chennai of ~0.2msqft) of rentals assets going up by ~14pp to ~82% (v/s FY15). Adjusted for effective stakes, we expect PHNX to post ~17% rentals CAGR over FY15E-19E to INR9.8b in FY19E (v/s 2x of INR4.9b in FY15E). Of the incremental rentals of ~INR5b, ~25% is attributable to stake increase and rest for renewals. 3 Phoenix Mills n Market City Mall has been continuously undergoing a re-strategizing process, with efforts to improve the brand mix, which may offer further upside scope on a revenue sharing basis. Exhibit 5: We factor ~17% rentals CAGR across 5 operating malls (INR b) Of the incremental rentals of ~INR5b from FY15, ~25% is attributable to stake increase and rest for renewals Asset rentals PHNX stake (as propsoed) 6.7 5.9 4.5 1.2 1.2 1.2 2.4 4.5 4.9 5.9 2.3 3.4 5.2 1.8 4.5 7.0 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 1.8 FY10 2.8 3.6 PHNX stake (current stakes) 11.3 9.3 8.6 8.1 7.3 6.9 6.0 5.5 1.8 9.8 8.0 FY18E FY19E Source: Company, MOSL Exhibit 6: Steady rise in effective stake across assets (%) HSP Pune Kurla (Mumbai) Bangalore Chennai Effective stake FY13 100.0 58.5 24.3 68.1 31.0 54 FY14 100.0 58.6 53.2 68.1 50.0 64 FY15 100.0 62.6 56.3 75.3 50.0 67 FY16E 100.0 74.6 65.6 75.0 50.0 72 FY17E 100.0 86.5 75.0 100.0 50.0 82 FY18E 100.0 86.5 75.0 100.0 50.0 82 FY19E 100.0 86.5 75.0 100.0 50.0 82 Exhibit 7: Stake increase in various subsidiaries Approx. INR4.65b of outflow towards stake purchase is pending, which would aid ~INR1.2b of additional rental income Date of 3QFY14 FY15-17 Vamona (Pune) 3QFY11 1QFY14 Island Star (Bangalore) FY11 FY13 FY15-17E Classic (Chennai) FY13 1% in Mumbai, 4% in Pune, 7% in Bangalore from Edelweiss Total Payment SPV Name Offbeat (Mumbai) Seller IL&FS Horizon Butala IL&FS IL&FS Horizon IL & FS Kshitij Stake 29.29% 21.26% 8% 24% 4.6% 26% 25% 16% Value (INR m) 1,570 1,600 250 716 185 680 3,150 530 690 9,371 Source: Company, MOSL Significant value unlocking from Dev Co portfolio yet to benefit n n n 17 April 2015 Almost 92% of consolidated debt of INR33.8b (effective stake of INR22.7b) is Lease Rental Discounting (LRD) and LRD equivalent, which is served by existing rentals. Against effective FY15 rentals of INR4.9b (post tax EBITDA of ~INR3b), the interest outgo stood at ~INR2.8b. This translates into operating malls as cash break-even. With added outflow of stake increase and construction of Chennai (Palladium) mall, benefits of surplus cash flow are yet to percolate. In Dev Co, PHNX has till date monetized ~33% of its 7.5msqft of residential and commercial assets in Bangalore, Mumbai, Chennai and Pune. While the recent pre-sales run-rate (0.5-0.7msqft) has been weak, we expect scale-up with launch cycle gaining traction and potential recovery in demand scenario. 4 Phoenix Mills n n n Based on current selling prices, we estimate ~INR35b (75-80% is attributable to PHNX based on final stakes) of net cash flow Based on current selling prices, we estimate ~INR35b (75-80% is attributable to PHNX based on final stakes) of net cash flow (pending collections plus unsold inventories less pending construction cost) across assets over the next three to five years. Pre-sales momentum improved in 4QFY15 with the launch of Kessaku, Bangalore (at INR12,500/sqft) in the luxury category. Impressive sales were recorded with 25% of the 130-unit inventory being sold with (ticket size of ~INR100m). Expected launch of Oberhaus (Bangalore) in 1QFY16 along with Fountainhead Phase II, Pune and The Crest – D, Chennai in FY16 contribute to a robust pipeline along with a positive outlook. Exhibit 8: Dev Co portfolio is only 33% monetized till date Project Location One Bangalore West Kessku Oberhaus* Paragon Plaza Art Guild House Centirum (15 LBS) The Crest Fountainhead I Fountainhead II* East Court Total Bangalore Bangalore Bangalore Mumbai Mumbai Mumbai Chennai Pune Pune Pune Area (msf) 2.20 1.00 1.02 0.45 0.76 0.28 0.88 0.35 0.28 0.25 7.47 Current Sales Balance Selling Value Collection price (INR (INR b) (INR/sf) b) 12,500 12,500 7,000 15,000 12,000 8.9 1.5 3.3 2.5 13,000 3.1 12,000 0.4 12,000 1.5 21.1 Unsold Construction Balance Inventory Cost (INR b)spending (INR b) 2.9 0.3 1.5 0.1 0.9 0.3 5.9 14.6 10.0 5.7 4.6 4.1 6.0 3.5 2.7 51.2 9.9 4.5 3.6 1.8 3.0 1.0 3.1 1.2 1.0 0.9 30.0 5.0 4.5 3.6 0.5 1.8 1.5 1.1 1.0 19.0 Source: Company, MOSL Exhibit 9: Expect meaningful surplus cash from Dev Co operations as launch cycle kicks in Dev Co cash flow (INR b) Balance Collections from presales (INR b) Unsold Inventory *(INR b) Construction Cost Pending (INR b) Pending Cash Flow over next 3 -5 Years Cash Outflow Expected for Stake Acquisition (INR b) Cash Available from Dev Co for capital growth *Valued at 10% discount to current quoted price 5.9 51.2 19.0 38.1 4.65 33.4 Source: Company, MOSL Next leg of growth capital hinges on success of Dev Co n n n 17 April 2015 PHNX is in a similar position presently as it was in mid-2000s -- looking for a strategic path towards future growth and expansion. With the foresight of consolidating its market leading position, PHNX may look at widening the asset portfolio by acquiring other operational retail malls which have the potential to be leaders in their respective markets. We expect the success of Dev Co monetization would be the key to drive strong growth and health balance sheet (by deleveraging) together. While raising debt or equity capital (REIT) remains a secondary option, management is optimistic that internal accruals would generate sufficient growth capital over the next three to four years. 5 Phoenix Mills 30.6 31.4 30.7 FY14 FY15E FY16E Exhibit 10: Cash flows from Dev Co to start de-leveraging FY17 onwards (INR b) 28.4 19.2 FY17E FY13 7.6 FY12 FY09 5.9 FY11 3.5 FY10 3.0 FY08 FY06 1.0 3.4 FY07 14.9 Source: MOSL Hotel re-branding around the corner, albeit has been elusive so far n n Entry of St. Regis to take over the management of the 335-room Palladium Hotel (Lower Parel) would be a boost to operations. Though the event timeline has been elusive so far, it is expected to be around the corner. However, current operations have improved with better brand mix, occupancy near 70-80% (~46% in FY14) and EBITDA reporting positive trends consistently. Exhibit 11: Operating parameters gradually improve at Palladium Hotel EBITDA (INR m) RevPAR (INR m) 6,619 -7 -11 63 75 39 21 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3,157 4,294 3,738 175 3QFY15 4,087 1QFY14 3,389 4,586 Source: MOSL Valuation and view n n n n 17 April 2015 PHNX has underperformed the BSE realty index by almost 13% over 4QFY15, largely led by concern on its retail specific risk (~80% of SOTP) in the advent of Etailing segment. As mentioned in the previous segments, we continue to believe that our rental growth expectation (~14% CAGR) has no major downside risk in the backdrop of healthy consumption trend recorded in these malls. PHNX has come out of a major capex cycle almost 15 months back, albeit stake increases in various assets curbed the deleveraging ability. Going forward, we expect the trigger in Dev Co operations and consolidation of economic interest, as the economic cycle picks up, to benefit significantly. The stock trades at 15.9x FY17E EPS, 2.3x FY17E BV and 18% discount to SOTP of INR455. Buy with an upside of 21%. 6 Phoenix Mills Exhibit 12: PHNX has underperformed the Realty index in CY15 Source: MOSL Exhibit 13: PHNX SOTP (INR m) 8,576 7,807 93,460 51,965 9,965 0 10,621 10,178 9,978 4,464 4,338 127 117,761 23,242 22,700 5,888 65,930 Residential Commercial Retail - Parel, Mumbai - Kurla, Mumbai - Bangalore, West - Bangalore, East - Pune - Chennai Hotels - Shangri-La, Parel - Other Market City Hotels Gross Asset Value (GAV) Less: Tax Less: Net Debt Less: Operating Exp Net Asset Value (NAV) NAV/Share 59 54 645 359 69 0 73 70 69 31 30 1 813 160 157 41 455 % of NAV 13% 12% 142% 79% 15% 0% 16% 15% 15% 7% 7% 0% 179% -35% -34% -9% 100% % of GAV 7% 7% 79% 44% 8% 0% 9% 9% 8% 4% 4% 0% 100% -20% -19% -5% 56% Source: MOSL Exhibit 14: PHNX PB Chart 4.0 P/B (x) 5 Yrs Avg(x) 3.0 2.0 1.0 Apr-15 Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Mar-11 0.0 Source: MOSL 17 April 2015 7 Phoenix Mills Financials and valuations Income Statement Y/E March Net Sales EBITDA % of Net Sales Depreciation Interest Other Income PBT Tax Rate (%) Reported PAT Adjusted PAT Change (%) (INR Million) 2010 1,230 775 63.0 172 86 243 759 147 19.4 617 617 157.6 2011 2,102 1,406 66.9 314 228 287 1,151 321 27.9 830 842 36.5 2012 3,945 2,114 53.6 563 944 446 1,053 189 18.0 864 1,056 25.5 2013 4,699 2,632 56.0 474 1,430 521 1,248 428 34.3 842 842 -20.3 2014 14,485 6,784 46.8 1,055 3,451 391 2,669 909 34.1 1,285 1,285 52.7 2015E 17,313 8,214 47.4 1,686 4,076 360 2,811 843 30.0 1,270 1,270 -1.1 2016E 22,909 11,008 48.0 1,856 3,951 400 5,601 1,680 30.0 2,957 2,957 132.7 2010 290 15,759 16,048 6,608 -24 2,190 24,823 7,955 633 7,321 9,137 5,601 4,736 3 431 671 3 3,628 1,969 1,724 244 2,764 24,823 2011 290 16,410 16,700 9,628 -9 1,965 28,284 8,880 948 7,932 10,997 4,787 8,833 1,182 961 816 1,182 4,388 3,083 2,723 360 4,568 28,284 2012 290 16,816 17,105 16,748 -247 3,566 37,173 13,383 1,503 11,880 13,591 4,869 13,058 2,516 618 1,000 2,516 6,045 3,710 3,297 413 6,832 37,173 2013 290 17,397 17,687 21,966 -447 4,252 43,458 29,916 2,079 27,837 1,670 5,554 22,370 7,770 876 683 7,770 5,061 6,202 5,546 656 8,398 43,458 2014 290 16,948 17,237 32,684 -858 7,200 56,263 44,831 3,134 41,697 2,351 3,528 30,568 11,417 1,968 851 11,417 4,590 10,464 9,941 523 8,688 56,263 2015E 290 17,879 18,169 33,684 -858 6,549 57,544 46,331 4,820 41,510 2,351 3,528 37,565 13,850 2,770 1,035 13,850 6,059 13,560 12,985 576 10,155 57,544 2016E 290 20,497 20,787 33,184 -858 5,631 58,744 51,331 6,676 44,655 851 3,528 44,708 16,037 3,436 1,180 16,037 8,018 18,961 18,327 633 9,710 58,744 Balance Sheet Y/E March Equity Capital Reserves Net Worth Loans Deffered Tax Liability Minority Interest Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Debtors Cash & Bank Balance Inventory Loans and Advances Current Liab. & Prov. Creditors Provisions Net Current Assets Application of Funds E: MOSL Estimates 17 April 2015 2017E 25,856 12,146 47.0 2,017 3,888 600 6,841 2,052 30.0 3,426 3,426 15.9 (INR Million) 2017E 290 23,415 23,705 32,184 -858 4,315 59,345 54,831 8,693 46,138 851 3,528 51,670 18,099 3,878 2,545 18,099 9,049 24,742 24,046 697 8,829 59,345 8 Phoenix Mills Financials and valuations Ratios Y/E March Basic (INR) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Profitability Ratios (%) RoE RoCE Leverage Ratio Debt/Equity (x) 2010 2011 2012 2013 2014 2015E 2016E 2017E 4.3 157.6 5.4 110.8 1.2 32.1 5.8 36.5 7.9 115.3 1.8 36.2 7.3 25.5 9.9 118.1 2.0 32.1 5.8 -20.3 8.9 122.1 2.0 40.3 8.9 52.7 19.4 119.0 2.2 29.0 8.8 -1.1 25.2 125.4 2.0 26.7 20.4 132.7 39.9 143.5 2.0 11.5 23.7 15.9 47.0 163.7 3.0 14.8 51.4 38.1 33.1 17.8 3.2 64.5 42.0 28.7 16.1 3.1 42.3 19.3 12.7 5.9 3.2 42.8 14.9 10.6 5.0 3.0 18.4 9.4 7.8 3.8 2.6 15.9 8.0 6.9 3.2 2.3 3.8 3.6 5.0 5.2 6.2 6.1 4.8 6.6 7.5 12.3 7.0 12.1 14.2 16.4 14.5 18.2 0.4 0.5 0.9 1.2 1.9 1.9 1.6 1.4 2010 759 172 86 147 1,702 2011 1,151 314 228 321 -500 2012 1,053 563 944 189 2,085 2013 1,248 474 1,430 428 1,550 2014 2,669 1,055 3,451 909 8,615 2015E 2,811 1,686 4,076 843 5,099 2016E 5,601 1,856 3,951 1,680 8,434 2017E 6,841 2,017 3,888 2,052 10,262 -3,207 -1,505 -1,076 -4,283 -2,785 -3,286 814 -1,971 -7,105 -5,020 -83 -7,188 -4,510 -2,960 -684 -5,194 -15,595 -6,980 2,025 -13,570 -1,500 3,599 0 -1,500 -3,500 4,934 0 -3,500 -3,500 6,762 0 -3,500 (Inc)/Dec in Net Worth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin. Activity 469 1,156 86 198 1,342 130 3,020 228 305 2,617 -550 7,120 944 339 5,287 -122 5,219 1,430 339 3,328 -1,772 10,718 3,451 373 5,122 0 1,000 4,076 339 -3,415 0 -500 3,951 339 -4,790 0 -1,000 3,888 508 -5,397 Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates -1,239 1,910 670 145 671 816 184 816 1,000 -316 1,000 684 167 683 851 184 851 1,035 145 1,035 1,180 1,365 1,180 2,545 Cash Flow Statement Y/E March PBT before Extraordinary Items Add : Depreciation Interest Less : Direct Taxes Paid CF from Operations (Inc)/Dec in FA Free Cash Flow (Pur)/Sale of Investments CF from Investments 17 April 2015 (INR Million) 9 Disclosures Phoenix Mills This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). 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