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CREDIT SUISSE ASSET MANAGEMENT LIMITED
Investing in Eastern EuropeApril 2008
Elizabeth Eaton, Senior Portfolio Manager
Asset Management
Eastern Europe & RussiaApril 2008
Slide 2
Emerging Markets in a Global Context
Despite dominating global growth and population, Emerging Markets continue to have disproportionately low levels of GDP and market capitalization
From a “big picture” view, there remains massive opportunity for investors in emerging markets
Developed Versus Emerging Markets, 2007E
20
74 76
80
26 24
0
20
40
60
80
100
Population GDP Market Cap
Developed Markets Emerging Markets
Source: National Statistical Services, ING Estimates
Emerging Market Contribution to Global Growth
42 4733
58 5367
0
20
40
60
80
100
2006 2007E 2008E
Developed Markets Emerging Markets
Eastern Europe provides unique opportunities within a GEM context
Anchor of European Union Membership – lowers long term economic risk and provides funding for development
Commodity exposure – growth area for both oil & gas and metal & mining
Advanced labor force and competitive tax rates
Close proximity to major export markets of the European Union
Asset Management
Eastern Europe & RussiaApril 2008
Slide 3
Eastern Europe – the Big Picture Population (mln)
0
100
200
300
400
500
600
Eur
ope
EU
15
Rus
sia
CIS
x-
Rus
sia
EU
+20
04
EU
+20
07
Bal
kans
Source: IMF, ING Estimates
The bulk of regional population is in Russia and other CIS countries, including Ukraine and Kazakhstan.
The overall economy of the region remains only one-fifth of that in Western Europe (EU 15).
Despite rapid convergence, GDP per capita still averages only 17% of the EU 15. Even the 2004 enlargement countries still have only one third the GDP of the EU 15.
There remains a great deal of “catch up” potential across the region.
GDP/Capita US$
0
10,000
20,000
30,000
40,000
Eur
ope
EU
+20
04
Rus
sia
EU
+20
07
Bal
kans
CIS
x-
Rus
sia
GDP (US$ bln)
0
2500
5000
7500
10000
12500
15000
EU 15 EM Europe
Asset Management
Eastern Europe & RussiaApril 2008
Slide 4
Economic Snapshot
2007 2008 2009 2007 2008 2009 2007 2008 2007 2008 2007 2008
Czech 5.9 4.4 4.2 4.8 5.9 3.3 -3.5 -3.0 -3.3 -4.6 33.5 33.5
Hungary 1.3 1.8 3.0 7.1 4.5 3.4 -6.1 -4.0 -5.3 -3.9 24.6 24.6
Poland 6.6 5.3 5.0 3.7 3.5 3.0 -2.5 -3.1 -4.2 -6.1 61.3 62.3
Romania 6.0 6.0 6.0 7.0 4.8 4.5 -2.5 -3.0 -13.4 -14.2 26.0 26.0
Kazakhstan 9.0 5.0 5.0 19.0 12.0 8.5 -2.2 -1.4 -2.5 -2.0 19.0 19.0
Russia 7.3 7.0 6.5 11.7 10.0 8.0 6.5 4.2 6.2 4.7 461.8 563.6
Ukraine 7.0 6.5 5.5 14.5 10.0 8.0 -3.8 -5.6 -4.3 -8.0 33.7 44.2
(USD bln)Nom. Fiscal Balance Current Account International Reserves
GDP (%yoy) Consumer Price Inflation (% of GDP) (% of GDP)
Economic outlook across the broad region remains strong.
Growth is in excess of 4% across markets, with the exception of Hungary where fiscal cutbacks continue to cause pain. On average, the region is expected to grow at 5.1% in 2008 versus 6.3% in 2007.
While a global slowdown could result in reduced exports, countries across the region are experiencing buoyant dometic demand which should leave them relatively insulated from any pullback.
Inflation pressure is likely to intensify in the region, with exposure to energy and tightening labor markets.
Interest rates are likely to rise in most markets, except Hungary where progress will be slow.
Source: Goldman Sachs estimates, Credit Suisse
Asset Management
Eastern Europe & RussiaApril 2008
Slide 5
Domestic Drivers Increasingly Important and Stock Selection is Key
Then
Improving macroeconomics
– Convergence process
– Russia’s recovery from 1998 crisis
Rising Commodity Prices
Very low valuation
Growing investor interest in the region
– Eastern Europe had historically been ignored as a distinct asset class
Now
Financials -- credit expansion across the region
Infrastructure -- public and private sector investment
Consumer – domestic demand is growing
Natural Resouces – remain a global force
Remaining undervalued assets
Bottom up delivery on investment performance supports valuation
But supported by
– Range bound commodity prices
– Stable macroeconomics & politics
Asset Management
Eastern Europe & RussiaApril 2008
Slide 6
Financials: Loan Penetration Remains Low
Households were unable to be indebted prior to the 1990s
Low level of product sophistication in retail – compared to both developed and emerging markets
Basic financial products, like credit cards and mortgage loans, are still being introduced
Deepening financial intermediation will provide strength not only to the banking sector itself, but through to domestic economies through consumption and investment as well
Loans to GDP (%) 2007E
0
25
50
75
100
125
150
175
200
HK
CN
KO TH KZ
HU
CZ ID BZ
PO
RU
Credit Card Penetration (% of Population)
0
20
40
60
80
100
120
140
160
180
RU
CH
PO
HU
MX
BZ
TU KO
Source: Credit Suisse, UBS Estimates
Asset Management
Eastern Europe & RussiaApril 2008
Slide 7
Financials: Eastern Europe in the current context
Many Eastern European banks continue to be funded through deposits and do not need to tap into the credit market to continue high levels of loan growth
– Kazakh banks, in general, are an exception
– Maintaining high levels of deposit growth will be key
Loan growth remains high, although we expect lower levels in 2008
– Focus continues to be on retail and consumer loans
Loan to Deposit Ratio, 2007
0
50
100
150
200
250
300
350
Kom
ercn
i
Pek
ao
PKO
Sbe
rban
k
OTP
Hal
yk
VTB
KKB
Alli
ance
Source: Credit Suissee Estimates
Loan Growth, 2007
0
5
10
15
20
25
30
35
40
45
50
55
Kom
ercn
i
Pek
ao
PKO
Sbe
rban
k
OTP
Hal
yk
VTB
KKB
Alli
ance
Asset Management
Eastern Europe & RussiaApril 2008
Slide 8
Financials: Sector View and Focus
Sector Drivers Credit penetration remains low across
the region Earnings growth remains relatively
high, albeit lower than in 2007 Retail products offer highest margins
Banks focused on SMEs, mortgage loans, small consumer loans, and credit cards
Watch the macro – how will rising inflation and interest rates effect the sector?
No direct sub prime exposure in Eastern European banks
Default risks remain low, despite some rise in unsecured lending
Access to capital is not yet problematic for most banks (Kazakhstan is the exception)
Foreign banks Could strategic holdings be reduced
in Central Europe? M&A in Russia likely to support
valuation
Stock Selection
Focus on growth in under saturated markets across the region
Poland – large cap banks with cross-selling opportunities; smaller, innovative banks looking at niche markets
Russia – highly favorable macro outlook combined with bottom-up structural growth in several products
Value plays
Hungarian banks look inexpensive, despite being very well managed
Kazakhstan will likely be ignored by risk-averse investors, despite rock bottom valuation
Avoid Romania
Asset Management
Eastern Europe & RussiaApril 2008
Slide 9
Infrastructure: A Growing Sector
Macro Drivers
Decades of under-investment
Urbanisation
Population growth
Bottlenecks to economic growth
Funding availability and new financing models
*Source: GE & Merrill Lynch
Asset Management
Eastern Europe & RussiaApril 2008
Slide 10
Infrastructure: Expected Spending
China ($400bn): Energy, transport, environment, Olympics, real estate
Russia ($250bn): Export facilities, pipelineand ports, housing
Gulf Region ($150bn): Real estate, water
India ($110bn): Roads, ports, oil and gas
Brazil ($100bn): Power generation and transmission, telecoms and transport
South Africa ($60bn): Electricity generation, rail freight,
road works related to 2010 World Cup, housing
Indonesia ($45bn): Roads, power generation, water treatment, oil and gas
Mexico ($60bn): Natural gas, toll roads, highwaysand airports, homebuilding
Central and Trans-European transport networkEastern Europe ($45bn):
USD1.2 trillion to be spent in emerging markets
Source: Merrill Lynch, CAIB, World Bank, IIF
Russia20%
China34%
Indonesia4%
Gulf13%
India9%
Brazil8%
Mexico5%
South Africa5%
CEE2%
Asset Management
Eastern Europe & RussiaApril 2008
Slide 11
Infrastructure: Central and Eastern Europe
Source: UN Economic Commission for Europe
Infrastructure spending in Central and Eastern Europe is likely to be dominated by the Trans-European Network for Transport, which aims to connect the CEE with Western Europe’s motorways, rail lines and waterways. The bulk of expenditure is expected to take place in Poland.
Transport financing is mostly funded by EU member states and transfers from the EU Cohesion Fund. Total fund transfers are expected to be around 3% of GDP each year through 2010.
Motorways (km/100,000 pop)
0
4
8
12
16
20
EUR
15
Croa
tia
Czec
h Re
publ
ic
Slov
akia
Ukra
ine
Bulga
ria
Turk
ey
Polan
d
Russ
ia
Hung
ary
Rom
ania
Source: CAIB
Asset Management
Eastern Europe & RussiaApril 2008
Slide 12
Infrastructure: Russia
Age Structure of Russia's Capital Equipment (Yrs)
0
10
20
30
40
50
1990 1995 2004
Social Infrastructure Spending to Increase (Rb bn)
0
20
40
60
80
100
Education Health Care Agriculture Housing
2006 2007F
Source: Deutsche Bank, Bloomberg
Russia has seen a steady decline in the quality of its infrastructure after years of underinvestment across most sectors.
The bulk of spending will be undertaken by state-controlled monopolies to upgrade oil pipeline and energy capacity. The Investment Fund (Rb140bn) is financing Public-Private Partnerships in road and railway infrastructure and utilities.
Housing is also getting particular attention: President Putin called for increasing new housing space to 100-130m sq m per year and setting up Rb$250bn fund to reform housing market (around 1% of GDP for next 4-5years)
Budget Balance (% of GDP)
02
46
810
1214
16
Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
Asset Management
Eastern Europe & RussiaApril 2008
Slide 13
Infrastructure: Real Estate Still Compelling
Modern Office Stock per '000 Inhabitants, sqm
0
2000
4000
6000
8000
St Pet
e
Mos
cow
Bud
apes
t
War
saw
Pra
gue
Par
is
Ber
lin
Lond
on
Mortgage Loans as a % of GDP
0
20
40
60
80
100
UK
US JA CZ
HU
PO KZ
TU RU
Source: Credit Suisse, UBS Estimates
Despite global concerns, the real estate sector in Eastern Europe remains in fundamentally good condition
The main driver continues to be structural shortage of quality real estate, where demand continues to outstrip supply and vacancy rates remain at extremely low levels in most major cities
There are not yet signs overheating in the mortgage sector, where penetration levels remain at a very low levels
Commercial property yields have fallen from peak levels, but early indications show rents are once again on the rise in capital cities
Asset Management
Eastern Europe & RussiaApril 2008
Slide 14
Infrastructure: Sector View and Focus Sector Drivers Infrastructure spending is growing
rapidly across Eastern Europe in order to upgrade aging capital stock
Government spending In accession countries, transfers
from the EU budget are tagged for specific infrastructure related projects
In Russia, the Private spending
Oil & gas companies are now starting major greenfield expansion plans
Utility sector is undergoing restructuring and requires massive amounts of capex to expand generation
Real estate sector is in fundamentally good condition despite global concerns Lack of supply in high-end
commercial real estate keeps rents high
Availability of mortgages and higher disposable incomes will drive residential sector
Stock Selection
Real estate remains compelling
Residential continues to benefit from mortgage growth and roll out
Preference for construction oriented companies rather than real estate investment funds
Polish construction companies will benefit from EU structural funds
Investment is not only focused on end owners of infrastructure assets, but on companies contributing to sector growth
Companies that make products for the end owners (steel companies)
Intermediaries that make investment possible (developers, banks, oil service companies)
Asset Management
Eastern Europe & RussiaApril 2008
Slide 15
Consumer: Domestic Demand Remains High and Growing
Total Retail Turnover, Russia
0
100
200
300
400
500
600
2004
2005
2006
F
2007
F
2008
F
2009
F
2010
F
$ bl
n
Retail Turnover, non-food
Retail Turnover, food
Overall, the Emerging European retail market is expected to grow close to 20% per annum until 2008
– Russia represents the strongest area of growth, with a 50% expansion in turnover between 2004 and 2006
Increased wealth of the population means higher spending in retail
Market share opportunities exist for large players as local markets remain highly fragmented
Russia is set to be largest retail market in Europe
Source: Rosstat, Renaissance Capital Estimates
Asset Management
Eastern Europe & RussiaApril 2008
Slide 16
Consumer: Sector View and Focus
Sector Drivers GDP per capita across the region
averages only 17% of Western European levels
Disposable income continues to rise at a steady pace Lower levels of unemployment Higher and wages (and growing) Regulated prices have kept some
costs low, such as electricity and gas
A broad range of consumers now have access to credit through the banking system Mortgage loans Credit cards Small consumer/home improvement
loans Retail trade is becoming formalized –
turnover is rising in modern format stores at the expense of open markets
An element of “trapped demand” remains in some areas where imported products were once scarce
Stock Selection Despite several recent listings,
consumer stocks remain under-represented in regional indices
There are virtually no pure consumer oriented stocks in either Hungary or Czech Republic
Poland Most consumer stocks are both
illiquid and expensive Prefer industry leaders and
established local brands with strong management teams
Use sell-offs as an opportunity Russia
Food retailers remain the most liquid and accessible part of the market – focus on companies with successful region roll-out strategies
Watch for impact of raw material costs
Asset Management
Eastern Europe & RussiaApril 2008
Slide 17
The world is resource short
Not finding enough additional resources
Demand continues to grow in emerging markets, secular and cyclical growth
Not enough development and service capacity – people and machines
Oil: non-Opec decline rates are accelerating
Slow supply side reaction
More difficult to produce and mainly non-conventional
Deeper and more complex horizons
Oil sands: expensive, new technology, environment
High technology intensity in enhanced oil recovery and heavy oil
High oil prices are a reality
Marginal cost of production at above $55-60/bl
Low spare capacity – unlikely to go – geopolitical threats likely to remain
Resources controlled by unstable regimes
Natural Resources: Key Beliefs
Asset Management
Eastern Europe & RussiaApril 2008
Slide 18
Natural Resources: A Global Force
Russia and Central Asia represent a significant portion of global production and reserves in several major commodity items
World’s largest producer of hydrocarbons
Large and growing base metals resource
Portion of global reserves in many commodity items is much, much higher
China and Greater Asia are growing consumers of CIS commodities – “Russian bear feeds Chinese dragon”
Russia as a % of World Production
12
21
11
3
21
6
13
48
128
4
9
22
7
18
8
0
10
20
30
40
50
Oil
Nat
ural
Gas
Alu
min
ium
Cop
per
Nic
kel
Ste
el
Pla
tinum
Pal
ladi
um
Ther
mal
Coa
l
Cok
ing
Coa
l
Chr
ome
Cob
alt
Dia
mon
ds
Mol
ybde
num
Pot
ash
Ura
nium
(%)
Source: GFMS Metals Consulting, IISI, Johnson Matthey, ABARE, BHP Billiton, Rio Tinto, Commodities Research Unit, USGS, World Nuclear Assoc.
Asset Management
Eastern Europe & RussiaApril 2008
Slide 19
Russian Oil & Gas: What can the Prime Minister Do?
Gazprom has always been the most leveraged Russian company, due to high taxation in the oil sector Russian integrated oil companies have been burdened by two main taxes
Crude export tax Mineral Extraction Tax (MET)
Government is slowly making changes in taxation to support future investment growth in the industry
– No tax for development in Eastern Siberian basin (since 2007)
– On the table: tax exempt development in Timan-Pechora (Lukoil), reduction in MET, sliding scale for domestic oil products
– Putin has generated full support from the president and relevant ministries, and claims the bill is ready for the Duma
Russian Oil Stocks, price performance YTD
50
60
70
80
90
100
110
120
130
140
150
08/0
1/20
08
22/0
1/20
08
05/0
2/20
08
19/0
2/20
08
04/0
3/20
08
18/0
3/20
08
01/0
4/20
08
15/0
4/20
08
29/0
4/20
08
13/0
5/20
08
Lukoil Novatek Gazprom Roseneft Surgut
Asset Management
Eastern Europe & RussiaApril 2008
Slide 20
Natural Resources: Sector View and Focus
Sector Drivers Oil price continues to surprise on the
upside Sell-side analysts are slow to
upgrade estimates and many remain “behind the curve” in 2007 – expect further revisions in 2008
Pricing in base metals will likely be volatile, but medium-term demand continues to outstrip supply Project delays and problems
damage supply side picture Demand from BRICs continue to
grow Cost of greenfield projects remains
high and high quality equipment is in shortage
M&A activity could be a catalyst in Russia and other CIS countries where companies remain relatively inexpensive and development potential remains high
Changes in taxation in the Russian oil & gas sector could be a catalyst, but is unlikely in the near term
Stock Selection Russian oil & gas
Integrated oil companies have been ignored despite high crude prices –changes in taxes are imminent
Prefer companies associated with local governments as they are likely to benefit from new licensing opportunities
Metals & Mining Russian metals companies remain
some of the cheapest in the world despite world-class resource bases
Expect political clarity to result in multiple expansion
Asset Management
Eastern Europe & RussiaApril 2008
Slide 21
Other Industries
Telecoms
Fixed line telecoms are now x-growth in most areas – optimization of balance sheets and high dividends will be drivers as businesses have reached maturity
Mobile companies still riding the wave of upgrades in ARPU over 2007
Broadband is growing rapidly across the region – Russian companies remain compelling
Media
Advertising penetration remains low across the Eastern European region and is a growth area
Listed companies have disappointed as competition has increased over time
Downstream oil
While refining margins are expected to be lower in 2008 than in 2007, we still find stock specific ideas in the industry
Refinery upgrades in Poland and Lithuania should provide a catalyst
Utilities
Electricity prices and acquisitions should fuel earnings growth in Central Europe
In Russia, sector restructuring has been a major driver
Government has now approved all major sector reforms
Demand for electricity is increasing and generation capacity must be built to fulfill future needs
Asset Management
Eastern Europe & RussiaApril 2008
Slide 22
Where are the risks?
Risks remain largely externally driven
Global growth and commodity prices
Risk aversion and change in global sentiment
Inflation
High inflation in Russia appears to be one of the few economic vulnerabilities
Current accounts stretched in some convergence countries
Can this be covered with FDI?
Hungary also suffers from large fiscal deficit
Asset Management
Eastern Europe & RussiaApril 2008
Slide 23
Eastern European Investment Team
Team Member Functional Title Location
Neil Gregson
Head of Emerging Market Equity, Global
Resources London
Elizabeth Eaton
Head of Emerging Europe, Middle East and
Africa London
Renata Klita Portfolio Manager, Eastern Europe London
Gregg Bridger Assistant Portfolio Manager, Eastern Europe London
Jacqueline de Sanctis
Client Portfolio Manager, Emerging Market
Equities Zurich
Vipin Ahuja Global Sector Portfolio Manager, Energy London
Anne Marieke
Ezendam
Global Sector Portfolio Manager, Health
Care/Pharma London
Simon Sheppard Global Sector Portfolio Manager, Metals & MiningLondon
Stephen Parr Global Sector Portfolio Manager, Telecoms London
Krisztina Kozma Portfolio Manager, Hungary Budapest
Tomasz Adamus Portfolio Manager, Poland Warsaw
Stanislaw Ozga Portfolio Manager, Poland Warsaw
Marcin Dabrowski Trader, Poland Warsaw
Petr Holinsky Portfolio Manager, Czech Republic Prague
Annabel Betz
Economist & Strategist, Global Emerging Market
Equity London
Asset Management
Eastern Europe & RussiaApril 2008
Slide 24
On the ground, Bottom-Up Security Selection adds Value
Asset Management
Eastern Europe & RussiaApril 2008
Slide 25
-13.4
16.9
40.8
67.5
29.9
44.0
-5.2
27.2
34.7
-13.8
17.0
31.3
72.6
25.3
33.1
-3.6
25.9
31.7
-20
-10
0
10
20
30
40
50
60
70
80
YTD 2007 2006 2005 2004 2003 1 Year 3 Year (Ann) 5 Year (Ann)
Per
form
ance
(%)
CS Equity Fund (Lux) Eastern Europe
Source: Credit Suisse, data as at 30 April 2008. Inception date September 1997Gross of fees, Base Currency EUR, LO-CEQEEF5BOPP.
Please note that past performance is not necessarily a guide to the future. The value of investments can go down as well as up.
Account: Credit Suisse Equity Fund (Lux) Eastern Europe Benchmark: MSCI EM Eastern Europe 10-40 Index in Euros/Prior to 1/1/07 MSCI EM Eastern Europe Index
Gross Returns as of 30 April 2008
Asset Management
Eastern Europe & RussiaApril 2008
Slide 26
CS EF (Lux) Eastern Europe
Source: Credit Suisse
Country AllocationAs at 30 April 2008
Sector AllocationAs at 30 April 2008
Czech Republic
Hungary
Russia
Regional
Cash
Kazakhstan
Poland
Consumer
Financials
MaterialsHealthcare
Industrials
Telecom
Utilities
Cash
Energy
*Regional includes Romania, Georgia and Croatia
Asset Management
Eastern Europe & RussiaApril 2008
Slide 27
-10.2
-8.1
0.7
8.9
-14.7
-10.1
4.3
1.3
-12.98-11.28
-3.87
4.66
-20
-15
-10
-5
0
5
10
15
20
YTD 6 Mo. 1 Yr. Since Inception
Per
form
ance
(%)
CS Equity Fund (Lux) Russia Explorer
Source: Credit Suisse, data as at 30 April 2008. Inception date May 2006 Gross of fees, Base Currency EUR, LO-RUSEXP5BOPP.
Please note that past performance is not necessarily a guide to the future. The value of investments can go down as well as up.
Account: Credit Suisse Equity Fund (Lux) Russia Explorer
Benchmark 1: MSCI Russia Benchmark 2: RTS Index in Euros
No comparative benchmark exists. Russian Indices shown only for reference purposes.
Gross Returns as of 30 April 2008
Asset Management
Eastern Europe & RussiaApril 2008
Slide 28
CS Equity Fund (Lux) Russia Explorer
Source: Credit Suisse
Country AllocationAs at 30 April 2008
Sector AllocationAs at 30 April 2008
Russia
Cash
Kazakhstan
GeorgiaConsumer
Financials
Materials
Healthcare
Industrials
Telecom
UtilitiesCash
Energy
Asset Management
Eastern Europe & RussiaApril 2008
Slide 29
Important Information
This communication is directed at institutional clients only. It should not be distributed to or relied upon by private customers.
This document has been prepared and issued by CREDIT SUISSE ASSET MANAGEMENT LIMITED, One Cabot Square, London E14 4QJ, www.credit-suisse.com/uk, Tel: 020 7888 1000, on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable, neither CREDIT SUISSE ASSET MANAGEMENT LIMITED, nor any director, officer nor employee, shall in any way be responsible for the contents. This document does not constitute investment advice and no reliance should be placed on its contents. It has been prepared for illustrative purposes only to demonstrate CREDIT SUISSE ASSET MANAGEMENT LIMITED's investment process and strategy.
The price of shares and income from them may fall as well as rise and is not guaranteed, You may not get back the amount of your original investment. Please note that past performance is not a guide to future performance. The value of investments can go down as well as up. Where investments are made internationally their values may fluctuate due to currency exchange rate movement. The yield quoted is appropriate at the time of going to print, but may fluctuate subject to market conditions.
Any research included in this document is for illustrative purposes only. It was procured for CREDIT SUISSE ASSET MANAGEMENT LIMITED for its own purposes and is no longer current. It should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy.
All forecasts are based on reasonable belief. The yields quoted in this document are appropriate at the time of going to print, but may fluctuate subject to market conditions.
CREDIT SUISSE ASSET MANAGEMENT LIMITED is authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.
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