AAPL by iBCAxiom

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									Company

North America United States TMT IT Hardware

19 October 2009

Apple Inc
Reuters: AAPL.OQ Bloomberg: AAPL UW Exchange: NSM Ticker: AAPL

Forecast Change Buy
Price at 19 Oct 2009 (USD) Price target 52-week range 189.86 250.00 191.29 - 78.20

Global Markets Research

Another beat; guidance is conservative- raise PT to $250
Chris Whitmore, CFA
Research Analyst (+1) 415 617-3213 chris.whitmore@db.com

Key changes
Price target EPS (USD) Revenue (USDm) 225.00 to 250.00 7.15 to 7.50 44,519.2 to 46,208.6 11.1% 4.9% 3.8%

Joakim Mahlberg

Research Associate ( ) 415 617-3348 joakim.mahlberg@db.com

Price/price relative
Performance (%) Absolute S&P 500 INDEX 1m 2.6 2.8 3m 25.1 16.8 12m 94.9 16.7

Another beat, guidance is conservative AAPL posted revs of $9.9B & EPS of $1.82 (vs. DB at $9.3B/$1.40, Street at $9.1B/$1.40). Adjusting for iPhone subscription accounting, AAPL posted proforma revenues of $12.3B and EPS of $3.12, reflecting strong iPhone profitability and positive mix. AAPL issued standard conservative C4Q guidance which we believe will be beat handily. We expect continued robust iPhone and Mac demand, int’l carrier expansion and new product cycles (Mac and iPhone) to drive continued momentum. We raise estimates and PT to $250. Reiterate Buy iPhone demand outstripping supply; China & Korea to ramp in Dec Q iPhone shipments of 7.4M beat consensus expectation (Street ~7M) despite supply constraints. In addition, iPhone showed positive mix to the 3GS model with ASPs increasing to ~$610 (vs. ~$560 in prior Q). The iPhone remains immensely profitable (we est. 60% GM) as it added an incremental $1.29 in EPS in the Q on a pro-forma basis (adjusting for subscription accounting). Further, Apple extended the geographic reach of the iPhone to 80 (64 countries for the iPhone 3GS) and will ship in China and S Korea in the Dec Q. Our Dec Q iPhone unit estimate increase to 8.5M units (vs. prior 8.0M). Robust Mac demand, iPods modestly below Apple had an exceptionally strong Mac quarter with its best back-to-school season ever and shipped 3.1M Macs (vs. DB at 2.7M). NB demand was particularly robust with MacBook units up +35% Y/Y (vs. NB market +9%) following the refresh/price cuts while DT units declined 16% Y/Y. iPods units totaled 10.2M which missed our model (DB at 11M). We believe Apple is well positioned for the holiday season and we anticipate new Mac form factors (DT refresh and lower priced entry level NB) in the next few weeks. Raising estimates and PT to $250; maintain Buy We adjust our FY10 GAAP EPS to $7.50 (vs. prior $7.15) and raise FY11 to $9.00 from $8.20. We also raised our FY10 pro-forma EPS to $11.50 (vs. prior $11) and our FY11 proforma EPS estimate to $14 (vs. prior $13.50). Further, our price target increases to $250 from $225 which assumes Apple trades at 17.5x proforma CY10E EPS x-cash (or ~15x CY10 EV/FCF); the lower end of its historical 1270x FTM PE. Risks to our thesis include slower consumer spending, price pressure in PCs and faster-than-expected saturation of the MP3 market.
Forecasts and ratios
Year End Sep 30 1Q EPS1 2Q EPS 3Q EPS 4Q EPS FY EPS (USD)
Source: Deutsche Bank estimates, company data
1

Stock & option liquidity data
Market Cap (USDm) Shares outstanding (m) Free float (%) Volume (19 Oct 2009) Option volume (und. shrs., 1M avg.) 174,148.2 917.2 100 7,825,724 21,238,020

Implied & Realized Volatility (3M)
100% 80% 60% 40% 20% 0% Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09
Realized Vol Implied Vol (ATM)

Implied Volatility (3M, ATM) vs. Peers
AAPL.OQ QCOM .OQ CSCO.OQ HPQ.N IBM .N
33.7% 30.5% 27.5% 25.5% 22.7%

* W eig ht ed - avg . o f ind ex co mp o nent s D at a as o f 19 - Oct - 0 9

2009A 1.78 1.33 1.35 1.82 6.29

2010E 2.10 1.70 1.71 1.98 7.50

2011E 2.51 2.05 2.06 2.39 9.00

Includes the impact of FAS123R requiring the expensing of stock options.

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 106/05/2009

19 October 2009

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Outlook
Apple reported revenues of $9.87B which beat expectations (DB at $9.30B, Street at $9.13B) and reported EPS of $1.82 which beat Consensus by $0.42 and its own guidance by $0.62 (vs. Street at $1.40). Apple reported exceptionally strong Mac units at 3.1M units (+17% Y/Y) on the back of its strongest Back-to-School season ever and recent product refreshes. MacBook units grew +35% Y/Y and offset DT weakness (units down 16% Y/Y). Despite the price cuts, Mac ASPs were better than anticipated at $1,294 (vs. DB at $1,279) due to favorable elasticity and mix shift towards the MacBook Pro. iPod units decreased 8% Y/Y to 10.2M (vs. DB at 11.0M) and were lighter than expected. In addition, Apple shipped 7.4M iPhones in the quarter, which beat consensus expectation of ~7M but was below our model at 8.5M due to supply constraints. In addition, Apple benefitted from positive product mix to the new 3GS which supported healthy ASPs and margins. Apple delivered GMs of 36.6% (vs. DB and 35.0%) with upside attributed to strong adoption of high margin Snow Leopard, positive iPhone mix, and lower than expected product transition / commodity costs. Opex was 2% lower than our model at $1,421 (DB at $1,450M) which allowed gross margin upside to flow to the bottom line and resulted in EPS of $1.82 (vs. DB and Street at $1.40). Operating profit beat our estimate by over 20%. A lower tax rate contributed to ~10c of the upside. iPhone continues to be a strong driver of growth as pro-forma revenues (adjusting for the subscription accounting) of $12.3B and pro-forma EPS of $3.12 was 71% greater than reported GAAP earnings. Importantly, proforma gross margins improved to 42.5% from 41.3% in the June Q, suggesting the new iPhone ramp is accretive to profitability. We estimate iPhone gross margins remain in the 60% range. Apple continues to show impressive resilience to weak macro conditions and is one of the few tech companies to grow through the economic downturn. In fact, Apple has not had a negative Y/Y growth quarter since March 2003. This momentum coupled with a greater geographic expansion (iPhone into China, South Korea and multiple carriers in the UK and Canada in the Dec Q) coupled with a strong pipeline: DT refresh and LE NB and/or tablet expected over the next few quarters, increases our confidence in AAPL’s ability to continue to outperform. Apple CFOps increased + 37% Q/Q to $3,110M and was modestly below our model (DB at $3,455M) due to some extension in DSOs resulting from a back-end loaded Quarter (iPod launch in Sept). As highlighted below, we expect Apple will continue to deliver FCF well in excess of GAAP earnings in CY10 due to the accounting treatment of the iPhone. Apple did not provide specifics regarding the timing of the implementation of the new accounting rules associated with the iPhone. Upon its implementation, we expect the difference between GAAP earnings and Cash flow / proforma earnings to narrow considerably. In the meantime, we continue to value AAPL using proforma and FCF metrics as they more accurately measure the economics of Apple.

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Figure 1: Apple FCF per share vs. EPS trend (calendarized)

$16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 2005 2006 EPS
Source: Deutsche Bank

2007

2008

2009

2010E

FCF/ Share

Not surprisingly, Apple provided standard conservative guidance of revs of $11.3-11.6B and EPS of $1.70-1.78 (Street at $11.5B/$1.91). However, as highlighted below we remind investors of Apple’s track record of beating its own guidance on average (past 12 quarters) with 8% revenue upside and 40% EPS upside. We believe Apple’s revenue and margin guidance appears conservative due to favorable / less onerous component trends, the mix shift towards iPhone, healthy Mac profitability and expected new DT and NB product refreshes. Figure 2: AAPL historical guidance trend vs. actual
Dec-06 Rev guidance midpoint ($B) EPS guidance midpoint $6.1 $0.72 Mar-07 $4.9 $0.55 Jun-07 $5.1 $0.66 Sep-07 $5.7 $0.65 Dec-07 $9.2 $1.42 Mar-08 $6.8 $0.94 Jun-08 $7.2 $1.00 Sep-08 $7.8 $1.00 Dec-08 $9.5 $1.21 Mar-09 $7.8 $0.95 Jun-09 $7.8 $0.98 Sep-09 $8.8 $1.21 Dec-09 $11.5 $1.74

Actual Rev ($B) Actual EPS

$7.1 $1.14

$5.3 $0.87

$5.4 $0.92

$6.2 $1.01

$9.6 $1.76

$7.5 $1.16

$7.5 $1.19

$7.9 $1.26

$10.2 $1.78

$8.2 $1.33

$8.3 $1.35

$9.9 $1.82

? ?

REV UPSIDE ($B) EPS UPSIDE

$1.0 $0.43

$0.5 $0.32

$0.3 $0.26

$0.5 $0.36

$0.4 $0.34

$0.7 $0.22

$0.3 $0.19

$0.1 $0.26

$0.7 $0.58

$0.4 $0.38

$0.5 $0.38

$1.1 $0.61

TBD TBD

% Rev upside Average rev upside % EPS upside Average EPS upside
Source: Deutsche Bank and company data

16% 8% 59% 40%

9%

6%

9%

4%

10%

4%

1%

7%

5%

6%

12%

58%

39%

55%

24%

23%

19%

26%

48%

40%

38%

50%

Estimate and valuation We raise our FY10 EPS to $7.50 (vs. prior $7.15) and FY11 to $9.00 from $8.20. Normalizing for iPhone accounting results in pro-forma EPS of ~$11.50 in FY10 (vs. prior $11) and proforma EPS of $14 in FY11 (vs. prior of $13.50). Further, our price target increases to $250 from $225 which assumes Apple trades at 17.5x pro-forma CY10E EPS x-cash (or ~15x CY10 EV/FCF); the lower end of its historical 12-70x FTM PE.

Deutsche Bank Securities Inc.

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Figure 3: Valuation
CY2009 EV/Sales EV/EBITDA P/E EV/FCF PE x-cash
Source: Deutsche Bank

CY2010 2.7 11.1 24.0 10.4 18.0

3.6 15.4 28.8 14.0 24.0

Risks Risks to our thesis include slower consumer spending, significant price pressure in PCs and faster-than-expected saturation of the MP3 market. Other risks include decreases in PC demand and the smart-phone market which could result in declining market share and difficulty maintaining pricing and margins which would negatively impact EPS and the company's stock price.

Operating Results / Performance versus expectations
Revenue Revenue grew 25% Y/Y to $9,870M, above our $9,295M estimate and above guidance of $8.7-8.9B. Key points in the quarter include: Mac units totaled 3.1M, above with our 2.7M estimate. CPU revenue of $3,952M was comprised of $1,086M in desktop revenue (down 20% Y/Y) and $2,866M in notebook revenue (up 27% Y/Y). Desktop units were down 16% Y/Y to 787K while notebook units increased 35% to 2,266K despite the challenging macro environment. iPod units were down 8% Y/Y to 10.2M units, below our 11.0M. iPod revenue decreased 8% Y/Y to $1,563M with a modest bump in ASPs (i.e. ASPs of $154 vs. $146 in the prior Q) due to a shift to the iPod Touch. iPhone revenues increased 185% (vs. 303% Y/Y last Q) to $2,297M and shipped 7.4M units in the quarter reflecting strong uptake of the 3GS iPhone. Revenue from Other music products, Peripherals and Software were $1,018M, $393M, and $647M, respectively. Other music products revenue was up 22% Y/Y helped by solid iTunes / App sales, software was up 18% Y/Y (Snow Leopard) and peripherals revenues decreased 8% Y/Y. Figure 4: Apple Revenue by Segment ($M)
Revenue by Segment Desktops Notebooks Subtotal CPU iPod iPhone Other Music Products Peripherals and Other HW Software and Other Total Revenue
Source: Deutsche Bank, Company data

F4Q08A 1,363 2,257 3,620 1,660 806 832 428 549 7,895

F1Q09A 1,043 2,511 3,554 3,371 1,247 1,011 378 606 10,167

F2Q09A 1,050 1,895 2,945 1,665 1,521 1,049 358 625 8,163

F3Q09A 1,129 2,200 3,329 1,492 1,689 958 341 528 8,337

F4Q09A 1,086 2,866 3,952 1,563 2,297 1,018 393 647 9,870

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Figure 5: Y/Y Revenue growth
F4Q08A Desktops Notebooks Total CPU iPod iPhone Other Music Products Peripherals and Other HW Software and Other Total Revenue
Source: Deutsche Bank, Company data

F1Q09A -31% 23% 0% -16% 417% 25% -1% -4% 6%

F2Q09A -22% -12% -16% -8% 302% 19% -13% 18% 9%

F3Q09A -18% -2% -8% -11% 303% 17% -22% 5% 12%

F4Q09A -20% 27% 9% -6% 185% 22% -8% 18% 25%

14% 18% 17% 3% 583% 38% 24% 28% 27%

ASPs Desktop ASPs decreased 5% Y/Y to $1,380, while notebook ASPs of $1,265 were down 6% Y/Y. iPod ASPs of $154 were up modestly at +1% Y/Y. Figure 6: ASPs and Y/Y growth
ASPs Desktops Notebooks iPod Y/Y ASP Growth Desktops Notebooks iPod
Source: Deutsche Bank, company data

F4Q08A 1,456 1,347 153

F1Q09A 1,433 1,398 148

F2Q09A 1,284 1,356 151

F3Q09A 1,330 1,254 146

F4Q09A 1,380 1,265 154

0% -5% -4%

-8% -8% -18%

-19% -9% -11%

-9% -13% -4%

-5% -6% 1%

Margins Gross margins of 36.6% beat our estimate of 35.0% primarily due a benefit from Snow Leopard, iPhone mix, lower than expected product transition costs and commodity cost increases which were lower than expect. Operating margins of 22.2% were ahead of our 19.4% estimate. SG&A accounted for 10.8% of revenue and was below our 11.3% estimate while R&D to sales was 3.6% which was better than our model (DB at 4.3%) aided by operating leverage from the top line beat. Figure 7: Operating metrics
Margins Gross Margin Operating Margin S,G&A: Sales R&D:Sales
Source: Deutsche Bank, company data

F4Q08A 34.7% 18.3% 12.7% 3.8%

F1Q09A 34.7% 20.9% 10.7% 3.1%

F2Q09A 36.4% 20.4% 12.1% 3.9%

F3Q09A 36.3% 20.1% 12.1% 4.1%

F4Q09A 36.6% 22.2% 10.8% 3.6%

EPS Apple reported EPS of $1.82 which beat expectation (DB and Street at $1.40). EPS upside was helped by gross margin upside, strong demand for Mac and iPhones and a better than anticipated commodity cost environment.

Deutsche Bank Securities Inc.

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Figure 8: Actual results vs. DB estimates
Apple Income Statement ($ millions except EPS data) FY Sept Total Revenue Cost of Goods Sold Gross Profit R&D SG&A Operating Income Interest & Other Income, net Pretax Income Taxes Net Income (Operations) Operating EPS (Diluted) Avg. Shares (Diluted) Margins Gross Margin Operating Margin EBITDA Margin Interest & Other Income, net Pretax Income Tax Rate Net Margin (Operations) S,G&A: Sales R&D:Sales % Change Y-Y Revenue Gross Profit Operating Income Net Income (Operations) Operating EPS (Diluted) Avg. Diluted Shares Out 4Q-08A 7,895 5,156 2,739 298 999 1,442 140 1,582 446 1,136 1.26 905

DB Estim ate 4Q-09E % change 9,295 18% 6,042 17% 3,253 19% 400 34% 1,050 5% 1,803 25% 30 -79% 1,833 16% 550 23% 1,283 13% 1.40 914 12% 1%

Actual 4Q-09A 9,870 6,256 3,614 358 1,063 2,193 45 2,238 573 1,665 1.82 914

% change 25% 21% 32% 20% 6% 52% -68% 41% 28% 47% 45% 1%

34.7% 18.3% 20.0% 1.8% 20.0% 28.2% 14.4% 12.7% 3.8%

35.0% 19.4% 21.4% 0.3% 19.7% 30.0% 13.8% 11.3% 4.3%

36.6% 22.2% 24.2% 0.5% 22.7% 25.6% 16.9% 10.8% 3.6%

27.0% 31.1% 36.0% 25.7% 24.4% 1.0%

17.7% 18.8% 25.0% 13.0% 11.8% 1.0%

25.0% 31.9% 52.1% 46.6% 45.0% 1.1%

% Change Q-Q Revenue Gross Profit Operating Income Net Income (Operations) Operating EPS (Diluted) Avg. Diluted Shares Out
Source: Deutsche Bank

5.8% 5.3% 3.6% 6.0% 5.8% 0.2%

11.5% 7.6% 7.8% 4.4% 3.8% 0.5%

18.4% 19.6% 31.2% 35.5% 34.7% 0.6%

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Appendix 1
Important Disclosures Additional information available upon request
Disclosure checklist Company Apple Inc Ticker AAPL.OQ Recent price* 189.86 (USD) 19 Oct 09 Disclosure 2,6,8,15

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See “Important Disclosures Required by Non-US Regulators” and Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company. 6. 8. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received noninvestment banking securities-related services.

Important Disclosures Required by Non-U.S. Regulators
Please also refer to disclosures in the “Important Disclosures Required by US Regulators” and the Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=AAPL.OQ.

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Chris Whitmore

Deutsche Bank Securities Inc.

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Historical recommendations and target price: Apple Inc (AAPL.OQ)
(as of 10/19/2009)
250.00
Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations

200.00

5 6 4

7 10

S ecurity Price

150.00

100.00

1

2 3

8

9

Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9, 2002

50.00

0.00 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09

Da te

1. 2. 3. 4. 5.

1/10/2007: 3/26/2007: 4/26/2007: 7/26/2007: 10/23/2007:

Buy, Target Price Change USD125.00 Buy, Target Price Change USD130.00 Buy, Target Price Change USD140.00 Buy, Target Price Change USD200.00 Buy, Target Price Change USD225.00

6. 7. 8. 9. 10.

4/24/2008: 7/22/2008: 10/3/2008: 10/22/2008: 7/22/2009:

Buy, Target Price Change USD235.00 Buy, Target Price Change USD200.00 Buy, Target Price Change USD140.00 Buy, Target Price Change USD150.00 Buy, Target Price Change USD225.00

Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of 10% or worse over a 12-month period

Equity rating dispersion and banking relationships
450 400 350 300 250 200 150 100 50 0

56 % 41 % 33 % 03 %26 %
Buy Companies Covered Hold Sell

38 %

Cos. w/ Banking Relationship

North American Universe

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Regulatory Disclosures 1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

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Deutsche Bank Securities Inc. North American locations
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International locations
Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00 Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234

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Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6701

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