Half-yearly Report

Baring Emerging Europe PLC Half Year Report for the six months ended 31 March 2015 Contents Investment Objective 1 Financial Highlights 1 Performance 1 The Alternative Investment Fund Manager 1 Chairman's Statement 2-3 Report of the Alternative Investment Fund Manager 4-6 Twenty Largest Equity Holdings 7 Income Statement 8-9 Balance Sheet 10 Reconciliation of Movement in Shareholders' Funds 11 Cashflow Statement 12 Notes to Half Year Report 13-14 Interim Management Report 15 Directors and Officers 16 Investment objective The investment objective is to achieve long-term capital growth, principally through investment in securities listed on or traded on an Emerging European securities market or in securities of companies listed or traded elsewhere, whose revenues and/or profits are, or are expected to be, derived from activities in Emerging Europe. Financial highlights 31 March 2015 31 March 2014 30 September 2014 Shareholders' funds (£000) 111,260 139,834 131,556 Net asset value ("NAV") per share 606.04p 717.17p 695.92p Share price 543.00p 639.00p 614.50p Discount of share price to NAV 10.4% 10.9% 11.7% Six months to Six months to Year ended 30 31 March 31 March September 2014 2015 2014 Total return per share (74.04)p (111.40)p (134.76)p Dividend per share* - - 19.00p *See note 2 on page 13. Performance (total return basis) Six months to Six months to Year ended 31 March 31 March 30 September 2015 2014 2014 Net asset value per share -9.9%* -13.3%* -15.9%† Benchmark# -11.0% -10.3% -13.3% Share price† -8.2% -12.1% -15.4% # The benchmark is the MSCI EM Europe 10/40 Index. † Source: AIC using Morningstar. * Source: Barings. The Alternative Investment Fund Manager The Alternative Investment Fund Manager is Baring Fund Managers Limited which is authorised and regulated by the Financial Conduct Authority. Chairman's statement Dear Shareholder, In the first half of our financial year, the crisis in Russia has again dominated returns, this time compounded by an unexpected collapse in the price of oil. It seems otiose to talk of regional returns when these two factors have dominated all else. Matthias Siller gives his views on all this in the manager's report which follows, but the overall movement in markets has been so dramatic since the onset of the crisis that even when things are not obviously improving, there seem to be some significant investment opportunities. Performance The Net Asset Value of your Company fell by 9.9% over the six month period to 31st March 2015, while the benchmark dropped by 11%. It was a half year of two halves, so to speak, with a particularly sharp fall in the first three month period followed by a fairly sharp rise in the second. The pattern follows the oil price and is of course dominated by what happened in Russia. In these circumstances, the signal is overwhelmed by the noise, and the relative performance of the portfolio is something of a random outcome. Nevertheless, as a Board we monitor performance against both peers and benchmark and in the six month period, your Company ranked 19th out of 51 peers. In the longer term, over 5 years, the Company ranked 16th out of 44 peers and over 10 years 4th out of 35. During the six month period whilst the absolute return has been disappointing, your Board is confident that in Matthias we have a skilled helmsman who has held his course in some of the most turbulent markets ever seen. Discount Management The Emerging European sector has been out of favour with investors. This is hardly surprising. One factor which illustrates this is that volumes in your Company's shares are running at around half the levels of three or four years ago. There has been constant gentle downward pressure on the discount, which has averaged 12.9% over the period, although it ended March at a level of 10.4%. I would remind shareholders that if the average discount exceeds 12% for the year as a whole, a tender will be triggered for up to 15% of the shares outstanding at 95% of NAV. In order to try and manage the discount effectively, we have operated for many years a share buyback programme and in the current period we repurchased 545,500 shares at an average discount of 12.1% for an outlay of £2.95 million. This added approximately 2 pence per share to the NAV in the period. With the market capitalization of the Company now around £105 million, and with trading volumes shrinking as explained, the Company needs to work hard to remain relevant for shareholders. The Board takes the view that the prospects in our markets are attractive enough that the area will come back on to investor radar screens at some point, but that in the meantime we need to continue to strike a balance between discount control and market capitalization. Income Account At this stage of the year, we normally show a deficit on the income account. Unusually, for 2015 we have a surplus so far of £561,000. This reflects changes to the timing of some important dividend payments. As in previous years your Board intends to distribute by way of dividend most of the net earnings available for this purpose. Whilst it is difficult to predict the dividend flow it is noteworthy that despite the difficulties in Russia, dividends are still being paid and we have also received some repayments from the Russian authorities of tax previously charged incorrectly. This evidence that the wheels of commerce continue to turn is a bright spot in a murky world. The Board Jo Dixon retired as a director and as the Chair of the Audit Committee at the AGM. I would like to reiterate our thanks to her for her contributions over the years. She has been ably replaced by Frances Daley. As I have explained, the Board is undergoing a general refreshment and over the next couple of years, it is planned that there will be further retirements and appointments. Gearing For the past year, the Company has had a borrowing facility available, although in the circumstances it was never drawn down. As you will see from Matthias's positive outlook, the Board felt it would be prudent to renew the facility, and this process has been completed on terms which we believe are attractive in the circumstances. It is likely that this borrowing will be drawn upon in the months ahead. Outlook It is easy to throw in the towel on an investment which has given its supporters as torrid a time as has Emerging Europe. In our view that would be a mistake. The dominant influence of geo-politics has obscured the fact that while business conditions are not easy, a cadre of highly credible, well managed companies exists throughout the region. At the bargain prices which prevail today, it is these which will deliver exciting returns when the influence of politics wanes and conditions return to something more like normal. Steven Bates Chairman 7 May 2015 Report of the Alternative Investment Fund Manager for the half year ended 31 March 2015 Performance Against the backdrop of very volatile markets, your Company posted a return of -9.9% in the NAV in Sterling terms against a benchmark performance of -11.0%. The period was characterised by a sharp drop in oil prices and substantial US dollar appreciation, hurting oil exporting economies and companies with highly leveraged balance sheets. On the positive side, the successful implementation of the Minsk II agreement in February between the leaders of the Ukraine, Russia, France and Germany helped to prevent an all-out war in Eastern Ukraine, ushered in a cease fire and largely stopped the bloodshed. In an environment where global growth stayed sluggish outside the US, Emerging European equities found themselves at very different stages in the economic cycle. The small, open economies of central Europe saw a continuation of economic improvement, extending to domestic consumption, helped by job creation and lower energy prices. Yet, EU-wide deflationary tendencies were also felt across central Europe, where central banks didn't hesitate to come forward with aggressive interest-rate cuts. This presented a particular challenge to the banking sector, especially in Poland, as profit margins came under pressure. In Greece, where tentative signs of a pick-up in economic activity contrasted with record youth unemployment and a general feeling of disenfranchisement amongst voters, the political far left, Syriza, won a landslide victory in early elections in January. The subsequent confrontations between the Greek government and the European Union, the main creditor of the heavily indebted state, have undermined consumer and business confidence and risk a return to full-blown economic crisis. Turkey, a net energy importer, greatly benefited from lower oil prices. The parliamentary elections, wars on Turkey's doorstep and President Erdogan's bid to transform the secular Kemalist constitution into a Presidential-style Republic, mean that the country now finds itself at a crucial juncture. It faces a historic chance to use the opportunity presented by lower energy prices to transform its consumer and construction-based economic model into one led by investment and reforms, while achieving a sustainable drop in inflation expectations. Substantial levels of US-dollar debt on corporate balance sheets remain the biggest issue for Turkey, indicating how important are both the anchoring of inflation expectations and the potential for lower long-term interest rates. Russia, one of the largest energy exporters globally, was already negatively affected by economic sanctions from its involvement in the Ukraine conflict as the steep fall in energy prices created a "perfect storm" for its economy. While many market participants expected a re-run of crises past, including the desperate defence of a fixed exchange rate, Russian Central Bank Governor Elvira Nabiullina took the bold step to introduce a free float regime for the Russian rouble earlier than expected, raised interest rates to 17%, and supported the banking sector with liquidity and capital as Russian individuals and corporates sold the rouble and bought US dollars. The Russian rouble, having fallen by more than 50% in the space of a couple of weeks, finally found equilibrium, which allowed the central bank to begin to reduce rates again, taking them to 14% by March. While this inflicted short-term pain on consumers, the banking sector and importers, the Russian authorities managed to regain the initiative and now find themselves in a situation where commodity exporters are enjoying rising US dollar receipts even under a dramatically lower price regime, and the state runs a budget surplus. By some measures the Russian rouble is now the most undervalued currency in the world, while the forecast drop in inflation over the course of 2015 should allow the central bank to consider further cuts in interest rates, in contrast to the situation in most other countries. The economic situation in Russia remains tense, and risks to the country's financial system remain, but it is safe to say that Russia can cope with lower oil prices. While the aggressive foreign policy actions by Russia brought widespread international condemnation, Mr Putin's decisive actions on territory many Russians consider home soil were hugely popular with his domestic audience. The cost has been to Russia's diplomatic standing as well as economic growth. We are likely to see European countries intensify their efforts to diversify gas supplies away from Russia towards suppliers in the Middle East, accessed through Turkey. In the case of Russia, we expect trade links to continue to strengthen with China and other partners in Asia. Activity We increased exposure to Russian stocks in December by investing in Norilsk Nickel and Lukoil, large commodity exporters benefiting from a lower rouble. As the rouble stabilised and oil prices started to recover, we increased exposure to domestic consumption, adding M.Video, the largest electronic goods retailer, to the portfolio. We sold Moscow Stock Exchange after the stock outperformed the market by a wide margin and reached our price target. Turkey's performance over the last six months was a story of two halves. As a clear beneficiary of lower oil prices, the Turkish stock market outperformed its peers by a wide margin in the last quarter of 2014, only to succumb to US dollar pressures, relatively weak domestic demand data and political noise. Having increased exposure in 2014, we sold into a rising market in January. In terms of portfolio exposure, we added to the banking sector in March, reducing exposure to Emlak, the state-owned real estate developer. In mid-caps, we added to the pharma distributor Selczuk Ecza, while selling our position in Brisa, the largest Turkish tyre manufacturer. In Poland, we took advantage of the weak performance of the banking sector by adding Bank Zachodni WBK to the portfolio. We sold our position in insurer PZU. Given that Poland's interest rate cycle should be about to turn, the interest earnings of banks could improve over the coming years, supporting stock prices. The portfolio's exposure to the Greek stock market remained very limited, with National Bank of Greece accounting for the lion's share of our Greek position. More than half of the company's value is represented by the bank's Turkish subsidiary, Finansbank, and we think this is not yet adequately priced by the market. Elsewhere, we participated in the secondary offering of Bank of Georgia. The largest financial institution of this country of five million people also holds assets across the healthcare and electric utility industries, offering the company various growth avenues. Outlook The last six months have put Emerging European equities to the test, and, for the first time in seven years, there was a sense of genuine panic when the fall in the oil price and the Russian rouble threatened to get out of hand. While the absolute performance over the reported period is far from satisfying, it is worthwhile to note that the portfolio's diversification played out positively. Turkey's performance is a good example in that respect, providing positive returns for the portfolio in the fourth quarter of last year while drastically underperforming after we reduced exposure in the early months of 2015. Further, it is encouraging to see that corporate governance keeps improving in the region, and remains in the focus of shareholders and management alike, with a number of companies surprising positively in terms of operational performance and dividend distribution. We also welcome the upbeat start into the New Year by Russian stocks, helped by good news with regards to the conflict in Ukraine. While this confrontation is far from being resolved it was encouraging to see diplomatic efforts bearing tangible results. As we look forward from here, it is our belief that Emerging European equities offer an attractive combination of deeply discounted share price valuations, healthy earnings growth prospects and bottom-up investment opportunities, which, in our view should attract growing interest in the asset class as well as providing potential for long-term investment gains in the future. Baring Fund Managers Limited 21 April 2015 Baring Emerging Europe PLC NAV per share; share price; % discount [GRAPHIC REMOVED] Fund, Benchmark and Country Returns (£) 30 September 2014 to 31 March 2015 [GRAPHIC REMOVED] Geographical exposure of portfolio (% Fund and % Benchmark) at 31 March 2015 [GRAPHIC REMOVED] Twenty largest equity holdings Equity portfolio The Company's twenty largest equity holdings at 31 March 2015, is set out in the following table: Holding Primary country of Market value £000 % of equity listing or investment portfolio 1 Sberbank Russia 8,737 7.9 2 Lukoil Holdings Russia 8,527 7.7 3 Norilsk Nickel Russia 5,453 4.9 4 Novatek Russia 4,986 4.5 5 Akbank Turkey 4,936 4.4 6 Magnit Russia 4,343 3.9 7 Luxoft Russia 4,318 3.9 8 Haci Omer Sabanci Turkey 3,883 3.5 Holdings 9 Tatneft Russia 3,752 3.4 10 Halk Bank Turkey 3,702 3.3 11 Gazprom Russia 3,615 3.3 12 Energa Poland 3,427 3.1 13 Turk Traktor Turkey 3,347 3.0 14 Mail.ru Russia 3,244 2.9 15 Vakif Bank Turkey 2,988 2.7 16 National Bank of Greece 2,839 2.5 Greece 17 Phosagro Russia 2,796 2.5 18 Mobile Telesystems Russia 2,722 2.4 19 PKO BP Poland 2,423 2.2 20 Ford Otomotiv Sanayi Turkey 2,205 2.0 82,243 76.0 Other holdings 27,954 24.0 Total investments 110,197 100.0 Income statement (incorporating the Revenue Account*) for the six months to 31 March 2015 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) (Audited) (Audited) Six months Six months Six months Six months Six months Six months Year Year Year to 31 March to 31 March to 31 March to 31 March to 31 March to 31 March ended 30 ended 30 ended 30 2015 2015 2015 2014 2014 2014 September September September 2014 2014 2014 Revenue Capital Total Revenue Capital Total Revenue Capital Total Notes £000 £000 £000 £000 £000 £000 £000 £000 £000 Losses on - (14,154) (14,154) -- (21,274) (21,274) - (29,326) (29,326) investments held at fair value through profit or loss Income 1,191 - 1,191 620 - 620 5,903 - 5,903 Investment (217) (217) (434) (316) (314) (630) (594) (592) (1,186) management fee Other (410) - (410) (539) - (539) (1,008) - (1,008) expenses Net return 564 (14,371) (13,807) (235) (21,588) (21,823) 4,301 (29,918) (25,617) before finance costs and taxation Finance (8) - (8) (3) - (3) (15) - (15) costs Return on 556 (14,371) (13,815) (238) (21,588) (21,826) 4,286 (29,918) (25,632) ordinary activities before taxation Taxation 5 - 5 (75) - (75) (665) - (665) Return 561 (14,371) (13,810) (313) (21,588) (21,901) 3,621 (29,918) (26,297) attributable to ordinary shareholders Return per 7 3.01p (77.05)p (74.04)p (1.59)p (109.81)p (111.40)p 18.55p (153.31)p (134.76)p ordinary share *The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. Balance sheet as at 31 March 2015 (Unaudited) (Unaudited) (Audited) At At At 31 March 31 March 30 September 2015 2014 2014 £000 £000 £000 Non current assets Investments at fair 110,197 139,215 130,700 value through profit or loss Current assets Debtors 155 4,540 726 Cash at bank and in 1,228 200 804 hand 1,383 4,740 1,530 Current liabilities Creditors: amounts (320) (4,121) (674) falling due within one year Net current assets 1,063 619 856 Total net assets 111,260 139,834 131,556 Capital and reserves Called-up share capital 2,167 2,282 2,222 Share premium account 1,411 1,411 1,411 Capital reserve 100,480 130,008 117,796 Redemption reserve 2,621 2,506 2,566 Revenue reserve 4,581 3,627 7,561 Total equity 111,260 139,834 131,556 shareholders' funds Net asset value per 606.04p 717.17p 695.92p share Reconciliation of movement in shareholders' funds Called-up Share share premium Capital Redemption Revenue capital account reserve reserve reserve Total £000 £000 £000 £000 £000 £000 (Unaudited) For the six 2,222 1,411 117,796 2,566 7,561 131,556 months ended 31 March 2015 At 30 September 2014 Return for the six - - (14,371) - 561 (13,810) months to 31 March 2015 Buyback of own shares - - (2,945) - - (2,945) for cancellation Transfer to capital (55) - - 55 - - redemption reserve Dividends paid - - - - (3,541) (3,541) Balance at 31 March 2015 2,167 1,411 100,480 2,621 4,581 111,260 Called-up Share share premium Capital Redemption Revenue capital account reserve reserve reserve Total £000 £000 £000 £000 £000 £000 (Unaudited) For the six 2,357 1,411 157,486 2,431 7,645 171,330 months ended 31 March 2014 At 30 September 2013 Return for the six - - (21,588) - (313) (21,901) months to 31 March 2014 Buyback of own shares - - (5,890) - - (5,890) for cancellation Transfer to capital (75) - - 75 - - redemption reserve Dividends paid - - - - (3,705) (3,705) Balance at 31 March 2014 2,282 1,411 130,008 2,506 3,627 139,834 Called-up Share share premium Capital Redemption Revenue capital account reserve reserve reserve Total £000 £000 £000 £000 £000 £000 (Audited) For the year ended 30 September 2014 At 30 September 2013 2,357 1,411 157,486 2,431 7,645 171,330 Return for the year to - - (29,918) - 3,621 (26,297) 30 September 2014 Buyback of own shares - - (9,772) - - (9,772) for cancellation Transfer to capital (135) - - 135 - - redemption reserve Dividends paid - - - - (3,705) (3,705) Balance at 30 September 2,222 1,411 117,796 2,566 7,561 131,556 2014 Cashflow statement for the six months to 31 March 2015 (Unaudited) (Unaudited) (Audited) Six months Six months Year ended to 31 March to 31 March 30 September 2015 2014 2014 Notes £000 £000 £000 Operating activities Income received from 1,763 1,136 5,951 investments Investment management (435) (630) (1,215) fees paid Other cash payments (506) (554) (1,019) Net cash inflow/ 6 822 (48) 3,717 (outflow) from operating activities Servicing of finance Interest paid (8) (3) (16) Taxation Overseas tax received/ 5 (76) (677) (paid) Financial investment Purchases of (56,817) (54,156) (115,443) investments Sales of investments 62,854 60,766 123,077 Net cash inflow from 6,037 6,610 7,634 financial investment Equity dividends paid (3,541) (3,705) (3,705) Net cash inflow before 3,315 2,778 6,953 financing Financing Buyback of ordinary (2,891) (5,890) (9,461) shares Net cash outflow from (2,891) (5,890) (9,461) financing Increase/(decrease) in 424 (3,112) (2,508) cash Notes to the half year report 1. Accounting policies These financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (`UK GAAP') and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (issued in January 2009). The accounting policies applied to this half year report are consistent with those applied in the accounts for the year ended 30 September 2014. 2. Dividend No dividend is payable in respect of the six months to 31 March 2015. Consideration will be given to an annual dividend in respect of the year ended 30 September 2015 at a Board meeting to be held in November 2015. An announcement will be made shortly after that meeting. 3. Comparative information The figures and financial information for the year ended 30 September 2014 are an extract from the latest published accounts and do not constitute statutory accounts. Full accounts for that period have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The half year report for the six months ended 31 March 2015 and for the six months ended 31 March 2014 have been neither audited nor reviewed by the auditors. 4. Shares in issue As at 31 March 2015 there were 18,358,543 ordinary shares of 10p each in issue (30 September 2014: 18,904,043 and 31 March 2014: 19,498,043) which excludes 3,318,207 ordinary shares held in treasury (30 September 2014: 3,318,207 and 31 March 2014: 3,318,207) and treated as not being in issue when calculating the net asset value per share. Shares held in treasury are non-voting and not eligible for receipt of dividends. During the period 545,500 ordinary shares were bought back to be cancelled at a cost of £2,945,000. A further 115,000 ordinary shares were bought back to be cancelled during the period 1 April 2015 to 6 May 2015 at a cost of £664,000. 5. Taxation The taxation credit of £5,000 (30 September 2014: £665,000 taxation charge; and 31 March 2014: £75,000 taxation charge) relates to overseas taxation. 6. Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow/(outflow)from operating activities (Unaudited) (Unaudited) (Audited) Six Six Year months months Ended 31 March 31 March 30 September 2015 2014 2014 £000 £000 £000 Total netrevenue (13,807) (21,823) (25,617) return before finance costs and taxation Net capital return 14,371 21,588 29,918 before finance costs and taxation Decrease in accrued 571 516 47 income Decrease in sundry (96) (15) (39) creditors Investment (217) (314) (592) management fee capitalised Net cash inflow/ 822 (48) 3,717 (outflow) from operating activities 7. Return per ordinary share The total return per ordinary share is based on the return on ordinary activities after taxation of £(13,810,000) (six months ended 31 March 2014: £ (21,901,000); and year ended 30 September 2014: £(26,297,000)) and on a weighted average of 18,652,032 ordinary shares in issue during the six months ended 31 March 2015 (six months ended 31 March 2014: weighted average of 19,659,472 ordinary shares in issue; and year ended 30 September 2014: weighted average of 19,515,035 ordinary shares in issue). Interim management report Going concern The Directors believe that, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, the Company has adequate resources and an appropriate financial structure in place to continue in operational existence for the foreseeable future. The assets of the Company consist mainly of securities which are readily realisable. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts. Principal risks and uncertainties The Board believes that the principal risks and uncertainties faced by the Company continue to fall under the following broad categories: ■Investment and strategy. ■Accounting, legal and regulatory. ■Loss of investment team or Alternative Investment Fund Manager. ■Discount. ■Corporate governance and shareholder relations. ■Operational. ■Financial. ■Future developments. Information of each of these is given in the Report of the Directors in the Annual Report for the year ended 30 September 2014. Related party transactions The Alternative Investment Fund Manager is regarded as a related party and details of the management fee payable during the six months ended 31 March 2015 is shown in the Income Statement on pages 8 and 9. There have been no other related party transactions during the six months ended 31 March 2015. Directors' responsibility statement The Directors are responsible for preparing the half-yearly financial report, in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge: ■ The condensed set of financial statements within the half-yearly financial report has been prepared in accordance with the Accounting Standards Board's statement "Half-Yearly Financial Reports"; and ■ The Interim Management Report includes a fair review of the information required by 4.2.7R (indication of important events during the first six months of the year) and 4.2.8R (disclosure of related party transactions and changes therein) of the FCA's Disclosure and Transparency Rules. For and on behalf of the Board Steven Bates Chairman 7 May 2015 Directors and officers Directors Steven Bates, Chairman Josephine Dixon (retired 15 January 2015) Saul Estrin Jonathan Woollett Ivo Coulson Frances Daley Secretary M. J. Nokes, F.C.A. Registered office 155 Bishopsgate London EC2M 3XY Company number 4560726 Alternative Investment Fund Manager Baring Fund Managers Limited 155 Bishopsgate London EC2M 3XY Telephone: 020 7628 6000 Facsimile: 020 7638 7928 Auditor KPMG LLP 15 Canada Square London E14 5GL Custodian & Depositary State Street Bank & Trust Company Limited 20 Churchill Place Canary Wharf London E14 5HJ Administrator Northern Trust Global Services Limited 50 Bank Street Canary Wharf London E14 5NT Telephone: 0207 982 2000 Registrars and transfer office Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone: 0871 664 0300 (calls cost 10 pence per minute plus network extras) Overseas: +44 208 639 3399 Email: ssd@capitaregistrars.com Website www.bee-plc.com Baring Asset Management Limited 155 Bishopsgate London EC2M 3XY Telephone: 020 7628 6000 (Authorised and regulated by the Financial Conduct Authority) www.barings.com Registered in England and Wales no: 02915887 Registered office as above.
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