Nanoco Group — Closer to commercialisation

Nanoco Group (LSE: NANO)

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Research: TMT

Nanoco Group — Closer to commercialisation

Nanoco has announced it has signed an agreement for a fourth work package from a major European customer relating to a longer wavelength material for enhancing the sensitivity of silicon sensors. Significantly, this package is for the delivery of an enhanced and scaled up version of the technology, indicating that the performance achieved so far merits scaling up the process and is consistent with management’s goal of having visibility of production revenues during calendar H222.

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Nanoco Group

Closer to commercialisation

Additional work package

Tech hardware & equipment

21 March 2022

Price

19.4p

Market cap

£60m

Net cash (£m) at end July 2021 (including loan notes but excluding £0.7m lease liabilities)

0.3

Shares in issue

307.2m

Free float

72.5%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.8

(4.0)

(7.4)

Rel (local)

9.3

(4.1)

(13.5)

52-week high/low

29.9p

17.1p

Business description

Nanoco Group is a global leader in the development and manufacture of cadmium-free quantum dots (QD) and other nanomaterials with c 560 patents. Focus applications are advanced electronics, displays, bio-imaging and horticulture.

Next event

Interims

12 April 2022

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco has announced it has signed an agreement for a fourth work package from a major European customer relating to a longer wavelength material for enhancing the sensitivity of silicon sensors. Significantly, this package is for the delivery of an enhanced and scaled up version of the technology, indicating that the performance achieved so far merits scaling up the process and is consistent with management’s goal of having visibility of production revenues during calendar H222.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

07/19

7.1

(3.8)

(5.0)

(1.34)

0.00

N/A

07/20**

3.9

(2.9)

(4.9)

(1.39)

0.00

N/A

07/21

2.1

(2.9)

(4.7)

(1.30)

0.00

N/A

07/22e

2.2

(3.0)

(4.8)

(1.37)

0.00

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated

Preparing for production

We have previously noted that the existing production capacity in Runcorn can generate sensing application revenues of £100m/year working 24/7. While this remains the case, we would caution investors against assuming that a successful conclusion to the programme with the major European customer, which we have previously inferred is ST Microelectronics, would immediately result in this level of revenues. ST is engaged with many customers that could potentially deploy sensing chips incorporating Nanoco’s material. Deployment by a major mobile phone company in a key handset model could potentially generate c £15–20m annual revenues working a single five-day shift, while deployment in a more niche application, such as virtual reality (VR) glasses, would generate lower revenues, but is likely to catalyse take-up by other customers.

Nudging estimates upwards

Management notes that the revenues from this fourth work package will benefit Q322, and now expects a year-on-year increase in revenues for FY22 as a whole. We therefore raise our revenue estimate by £0.2m to £2.2m and reduce our estimate of EBITDA loss by £0.1m to £3.0m. The group continues to have a cash runway for organic business activities into calendar H222, at which point there should be good visibility of both potential production orders and the outcome of the patent litigation.

Valuation: Resolution of patent infringement still key

Ahead of the programme with ST definitely moving to commercial production, we believe that much of Nanoco’s value still lies in a satisfactory resolution of the patent infringement dispute with Samsung. Although the value of a potential payout has not been disclosed, we calculate that lost revenue in the United States attributable to the patent infringement to date could be in the region of US$200–250m or more. Any damages awarded could also make an additional allowance for future sales of infringing TVs and a possible uplift for wilfulness.

Estimate revisions

Management notes that the revenues from the fourth work package mean that FY22 revenues are likely to be higher than the £2.1m generated in FY21. We have made some minor adjustments to our FY22 estimates (see Exhibit 1) to reflect this statement.

Exhibit 1: Changes to estimates

Year-end July

FY21

FY22

£m

Actual

New

Old

% change

Revenues

2.1

2.2

2.0

10.0%

Gross profit

1.9

2.0

1.8

10.3%

EBITDA

(2.9)

(3.0)

(3.1)

-5.0%

Normalised PBT

(4.7)

(4.8)

(4.9)

-3.1%

Normalised net income

(4.0)

(4.2)

(4.3)

-3.6%

Normalised diluted EPS (p)

(1.3)

(1.4)

(1.4)

-3.6%

Net debt/(cash)

(0.3)

2.2

2.4

-6.4%

Source: Nanoco data, Edison Investment Research

Management has also announced that it is relocating R&D and scale-up activities from its Manchester R&D centre to the Runcorn production facility and vacating the Manchester site. This follows a previously announced decision to exit one floor of the Manchester facility. Vacating the Manchester site entirely will result in some additional minor cost savings in FY23, though the savings will be partly offset by the cost of recommissioning the production facility. Importantly, having R&D and scale-up experts at hand as the Runcorn facility is readied for commercial production will expedite that process.

Valuation

While the award of the fourth work package from ST increases the likelihood of Nanoco generating revenues from the supply of nanomaterials for sensing applications, ahead of a programme with ST or others definitely moving to commercial production, we believe that most of Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung. While the outcome of this litigation is by no means certain, we note that the large US litigation finance specialist funding the costs of the litigation undertook detailed due diligence before agreeing to provide finance. The lawyers, who are working on the case on a discounted fee basis, also carried out due diligence.

A final decision on the validity of the patents is expected by May 2022. If this is favourable, Nanoco will have cleared the first of two major hurdles in proving validity. The court hearing will then focus on infringement and damages, with validity effectively a settled matter by then. The transcript of the oral hearing in the inter partes reviews (IPRs) of the five patents in the case, which took place on 23 February 2022, was released on 17 March 2022. While the transcript of the oral hearing is subject to interpretation, Nanoco believes that the judges’ lines of questioning appear, on balance, to favour Nanoco’s position on each point.

Nanoco estimates that between April 2015 and the present Samsung has sold more than 14 million TVs deploying QDs based on Nanoco IP in the United States, which represents around one-third of its global sales. While Nanoco has not revealed its estimates of the potential payout if the litigation is successful, it has disclosed three possible damages models for calculating the value of the lost revenue to Nanoco:

Top end: damages based on the premise that Samsung’s QD TV market in the US is wholly enabled by Nanoco’s QD technology, so the value of the lost revenue would be derived from the total value of that market.

Mid: damages based on the premise that the QD-enabled display is a high proportion of the additional value of a QD-enhanced TV compared with a standard TV.

Low end: damages based on the value only of the QD film in the displays.

Further options exist. Applying the low-end valuation model, we assume the QD enhanced TVs had an average sales price of US$2,200–2,500 compared with the average price of a top of the range TV without QDs of c US$1,000. Had the alleged patent infringement not taken place, we believe that the volumes of QDs Samsung required would have been higher than Nanoco could have produced in Runcorn, so it would have licensed its technology to partners, primarily Dow Chemical, and would have received significant royalties. If we assume that the cost of the QDs in each TV is equivalent to 10% of the uplift in price between QD and non-QD TV displays, and that Nanoco would have received a 12% royalty (as per our May 2017 initiation note) on these QDs, this represents US$14.4–18.0 in lost revenue per TV display or US$200–250m between April 2015 and the present in the United States alone.

Any damages awarded may also make an additional allowance for future sales of infringing TVs and a possible uplift of up to three times for wilfulness. While the ongoing litigation only covers the United States, we understand that Samsung would also be likely to seek a global negotiated settlement covering sales in other territories. Nanoco would retain 50–80% of the award, depending on its magnitude, and would have to pay UK corporation tax on the amount received, which could be offset against £36m losses.

Exhibit 2: Financial summary

£m

2019

2020

2021

2022e

Year end 31 July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

restated

Revenue

 

 

7.1

3.9

2.1

2.2

Cost of Sales

(0.7)

(0.3)

(0.2)

(0.2)

Gross Profit

6.5

3.5

1.9

2.0

EBITDA

 

 

(3.8)

(2.9)

(2.9)

(3.0)

Operating profit (before amort. and excepts).

 

(5.0)

(4.8)

(4.6)

(4.3)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.3)

(0.7)

0.0

0.0

Share-based payments

(0.2)

(0.4)

(0.4)

(0.7)

Reported operating profit

(5.5)

(5.9)

(5.0)

(5.0)

Net Interest

(0.0)

(0.1)

(0.1)

(0.5)

Profit Before Tax (norm)

 

 

(5.0)

(4.9)

(4.7)

(4.8)

Profit Before Tax (reported)

 

 

(5.5)

(6.0)

(5.1)

(5.5)

Reported tax

1.2

0.9

0.7

0.6

Profit After Tax (norm)

(3.9)

(4.0)

(4.0)

(4.2)

Profit After Tax (reported)

(4.4)

(5.1)

(4.4)

(4.9)

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(3.9)

(4.0)

(4.0)

(4.2)

Net income (reported)

(4.4)

(5.1)

(4.4)

(4.9)

Average Number of Shares Outstanding (m)

286

287

306

306

EPS - normalised (p)

 

 

(1.34)

(1.39)

(1.30)

(1.37)

EPS - normalised fully diluted (p)

 

 

(1.34)

(1.39)

(1.30)

(1.37)

EPS - basic reported (p)

 

 

(1.52)

(1.77)

(1.44)

(1.60)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

5.6

4.6

3.4

3.0

Intangible Assets

3.9

3.7

2.9

2.6

Tangible Assets

1.7

0.9

0.5

0.4

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

9.5

7.2

5.8

2.7

Stocks

0.2

0.1

0.1

0.1

Debtors

1.1

1.0

1.2

0.7

Cash & cash equivalents

7.0

5.2

3.8

1.2

Other

1.1

0.9

0.7

0.7

Current Liabilities

 

 

(5.0)

(3.6)

(2.4)

(2.2)

Creditors

(2.6)

(2.3)

(1.6)

(1.5)

Tax and social security

0.0

0.0

0.0

0.0

Short term financial leases

(0.7)

(0.6)

(0.5)

(0.5)

Short term bank debt

0.0

0.0

0.0

0.0

Other

(1.6)

(0.6)

(0.3)

(0.3)

Long Term Liabilities

 

 

(1.8)

(1.3)

(3.8)

(4.3)

Long term financial leases

(1.0)

(0.5)

(0.1)

(0.6)

Loan notes

(0.4)

(0.5)

(3.5)

(3.5)

Other long-term liabilities

(0.4)

(0.2)

(0.1)

(0.1)

Net Assets

 

 

8.3

7.0

3.1

(0.8)

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

8.3

7.0

3.1

(0.8)

CASH FLOW

Op Cash Flow before WC and tax

(3.8)

(3.0)

(2.8)

(3.0)

Working capital

1.8

(1.4)

(1.4)

0.3

Exceptional & other

(0.0)

(0.8)

(0.1)

0.0

Tax

1.4

1.1

0.9

0.7

Operating Cash Flow

 

 

(0.6)

(4.1)

(3.5)

(1.9)

Capex

(3.1)

(0.7)

(0.3)

(0.4)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

0.0

0.0

(0.0)

(0.1)

Equity financing

0.0

3.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

2.3

0.0

Net Cash Flow

(3.7)

(2.4)

(1.5)

(2.4)

Opening net debt/(cash) - excluding finance leases

 

(10.3)

(6.6)

(4.7)

(0.3)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.6

(3.0)

0.0

Closing net debt/(cash)

 

 

(6.6)

(4.7)

(0.3)

2.2

Source: Company data, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Nanoco Group and prepared and issued by Edison, in consideration of a fee payable by Nanoco Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Nanoco Group and prepared and issued by Edison, in consideration of a fee payable by Nanoco Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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