Month: July 2014

King Wan Review

We have briefly covered King Wan (KW) previously with a 3Q update. At that time, KTIS has yet to be listed on the Thai Exchange. Fast forward to the present, with the completion of KTIS’s listing and the release of KW FY14 Annual Report, we take this opportunity to revisit our investment in the company. As our thesis was based mainly on asset value, the bulk of our analysis will be as such.

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KTIS Holdings

Upon listing, KW received approximately SGD47.6m worth of shares in KTIS at a listing price of 10 THB each. Taking into account the recent fall in price (9.55THB), KW’s holdings are now worth SGD45.5m, of which SGD21.6m has been recognised in books. Therefore, we have revaluation gains of SGD23.9m.

Vessel Holdings

KW also owns a ‘Supramax’ Bulk carrier held through its 30% owned associate. Gold Hyacinth Development Pte Ltd.  This was originally purchased for USD21m, or approximately SGD26.25m based on an exchange rate of 1.25, during a period when the Baltic Dry Index was floundering near a post-crisis low level of 698. Based on DMG’s report in April, the vessel then commanded a market value of USD28m or SGD35m. Correspondingly, KW’s stake will be worth SGD10.5m, a gain of SGD2.6m. However, do note that the Baltic Dry Index in April was almost twice of its current level.

Dormitory Venture

KW recently ventured into the worker dormitory business via a 19% stake in a consortium. The land (in Tuas) has a lease term of 20 years and is to be developed to a facility with 9200 beds. It is anyone’s guess how much profits this will bring, but based on my research, the average rate for 1 bed will conservatively be around SGD250/month. Assuming an occupation rate of 80%, I expect the facility to generate about SGD4.2m in annual revenue for KW. If we use Centurion’s Holdings 3-year low net profit margin of 15% as a reference, we get estimated profits of SGD0.6m. Assuming a dummy discount rate of 10% (I have no confidence in my WACC calculation), terminal growth of 0%, we value the dormitory holdings at SGD5.5m

Pseudo-Sum-of-Parts Value

Adding all gains, totalling to SGD32m, to the current reported NAV of SGD86.4m, we arrive at a RNAV value of SGD118.4m. Based on the current number of outstanding shares, we therefore have a fair value of about SGD0.34, which is fairly close to its current share price.

Challenging M&E Industry

Due to public displeasure about the amount of foreign workers, the Singapore government has been steadily tweaking its policies to reduce the amount of foreign workers employed by companies. As a mechanical engineering company, KW relies heavily on foreigners for its labour. You can see that we are starting to observe the effects of the policies through the increased labour costs, with gross profit margins falling consistently from 23.8% in 2012 to 14.8% in 2014. While revenue has been increasing steadily, this hasn’t added much to the bottom line. If we discount KTIS’ contribution of SGD7.2m in 2012, net profit has from its core operations have actually been decreasing. In the past, the price afforded a margin of safety sufficient to offset this, but given KW’s share price increase, this is no longer something we can be certain of.  To put things simply, even if KW were to maintain its very impressive top line growth, profits would still be decreasing. To top it off (pun intended), with the slowdown in property markets, I think it would be a challenge for KW to continue its top revenue growth.

Property Developments

Things are not all bad for KW however; our fair value of SGD0.34 has been based on the assumption that we value its operations and its property developments at book value. Through its associates, KW has stakes in a number of properties in Singapore, Taiwan and China which are accounted at book value of SGD2.1m. The properties and their estimated values are as below:

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The estimates are based on average transacted prices from Squarefoot Research multiplied by the net leasable area from the official condo websites, note that these values do not include the cost of development and percentage sold. Unfortunately, we do not have enough information to value the remaining properties in China and Thailand, but I think at book value of SGD2.1m, we are fairly safe from much downside, in light of the fact property sales in Singapore and China have slowed down considerably.


Upon KTIS’s listing and its current share price of SGD0.345, we think that our original thesis (value of KTIS) for KW has already run its due course given our targeted fair value of SGD0.34. Moving forward, we have identified downside risks to its operations, negated by upside potential from its property developments. Potential for future revaluation gains are definitely present, but since we are unable to place an estimate, we refrain from including them in our calculation of fair value to be on the safe side. One thing is clear that the margin of safety is much lower now, with future returns to be more uncertain than before given the volatile nature of KTIS shares and KW’s vessel holdings. Furthermore, given how KW is currently trading at P/E 17.9x, normalised EV/EBITDA 13.1x and normalised FCF yield of 3.23%, we have decided to exit our position in King Wan Corporation. We leave it to each individual to weigh the risks and potential gains based on your risk appetite..

Disclosure: The authors have no vested interest in 554.SI

3 Lessons From Investing

The thing I enjoy most about investing is the complexity and how it never ceases to amaze me. It is fundamentally finance related, yet has elements of different fields of studies – politics, real estate, law, human dynamics, psychology etc. One day I could be reading a research by Joel Greenblatt, a renowned value investor and another day it could be by Michael Mauboussin, an expert in the field of behavioral finance. After close to 4 years of investing, I have decided to list the top 3 key points I learnt from investing.


Nothing comes free, especially knowledge. Every successful person in his/her own field did not get there by sheer luck. With value investing, it requires a huge amount of reading, and that reading never ends. Every day, there is something new to read. Reading the latest company news, analyst report, value investing article, the list is endless. One would think great investors like Lee Cooperman, having spent nearly 5 decades of his life doing investment research, now has it easy when it comes to investing. However, that isn’t the case. With a lifestyle starting from 5.15am, he spends nearly most of it working, till before bed at 11pm. That is definitely dedication.

“Unfortunately one day they’re going to find him slumped over at his desk and that’s going to be it. He’ll die happy.” – Michael Lewitt

While I am not saying that we all need to be like Cooperman, however, to excel in investing, one needs to put in their fair share of work. The basics such as financial jargons, an investing framework and investing theories are all the essential work one has to initially put in. That read of Intelligent Investor for value investors starting out is mandatory, despite how boring it may be. Leading the research team in my University’ investment society, I have constantly been told to make my analysis more appealing and simpler so that even someone without any investing knowledge would be able to understand it. However, many a times, I find this extremely difficult as there are certain basic financial jargons that one is expected to at least have taken the effort to read up on.


A sad but hard truth about value investing is that it isn’t for people who have a constant need for change. Sorry to disappoint, but that adrenaline rush each day of entering in and out of the market one is seeking, is not something you would be experiencing with value investing. With value investing, you are in it for the long game. The secret to value investing is patience. To be honest, it is not really much of a secret since it is a well known fact. However, the reason why value investing still works is that patience is not a trait everyone has in today’s world. With the speed at which everything is changing these days, how many really has the patience to just sit there and patiently wait for the stock to reach fair value. Furthermore, when does the stock price really hit its fair value? That is really a mystery as Graham would say. Would a stock remain undervalued forever? I hope not, but it is not impossible. A fine example would be Guocoleisure (SGX:GLL), a well known deeply undervalued stock. The reason why this stock is undervalued would largely be due to market skepticism over value-unlocking drivers. Many institutional investors like Third Avenue Asset Management and Marathon Asset Management, long time investors in GLL have too sold down their stakes. While the stock may remain undervalued for an indefinite amount of time, however, what we can do is just position our portfolios and just wait. As of today, GLL have started trending upwards given how management started taking steps in unlocking the value in its assets.

Great Supportive Network:

Have a great supportive network. No matter how intelligent you are, there is no way that you have considered every single aspect to a certain issue/investment. In discussions, I rather have more people differing than supporting my view. For every argument you break down, it just strengthens your argument – a great read on this would be the ’12 Angry Men’ experiment. I have always believed in the right of freedom of speech. With freedom of speech, it allows good ideas to thrive and bad ideas to just fade away. Through this process, one’s thought process would definitely mature. This is the same with value investing. Having people provide constructive criticism on your investment idea, allows one to improve their analysis in the future. Furthermore, through the mistakes of others, it helps one speed up their learning process.

Starting out investing, I would say that I was extremely lucky. Not only did I have my father to look through my investment thesis to check if it was sound, I had my best friend who had a common investing mindset. Given that it is the 21st century, I had a vast amount of online resources to read – investment bloggers who were did equity research write-ups and all. Special thanks would definitely have to be given to Musicwhiz and Kyith who replied to my ‘Help’ email on how I should begin investing. I guess it was thanks to the presence of these blogs was I able to skip various beginner mistakes – valuing a company using a DCF model.

To sum it up, for readers just beginning their investing journey, I hope this article would serve as a good starting point. Fret not, for what is bitter to endure, is sweet to remember. While to the rest of us more-seasoned investors, it is always good to look back at this journey of ours, spend some time reflecting on our mistakes and how we have emerged stronger from it.

Market Timing

Two concepts widely debated on would be timing the markets. Essentially, the former refers to individuals entering and exiting the market at crucial moments to effectively maximize their returns. While the latter just refers to individuals entering the market and holding on till the stock has reached its fair value. Despite being a value investor, even I have constantly questioned myself regarding this issue.

What if I sold King Wan Corporation when it hit the previous high of 34c, and bought back when it reached the low of 25c?

Honestly speaking, following such a method I would have made a huge load more money. However, the crux is that this is all in hindsight. Would I know back then to sell? Did I even have the inclination to sell? The answer would be NO! Given that we are just merely mortals, how are we able to effectively time the markets? Aside from technical analysis, and other factors such as market psychology and economic news, with that many variables how does one perfectly time the market? To date, I have yet to have met someone who has been able to effectively time the market.



I would like to highlight a research done by Schwab Corporation on market timing. (Click Here)

Key Summary:

The best results goes to the individual who was able to time the market perfectly for the research period of 20 years, accumulating $87,004. While the individual who did not time the market came in second with $81,650 – only $5,354 less that the winner. For the amount of effort spent by the first individual compared to the second to only outperform marginally, is he truly the winner?

To conclude, this article isn’t about which method is ‘right’ or ‘wrong’, but rather the difficulty of timing the market especially with the amount of emotions involved. Essentially, the most realistic strategy for the majority of us would be to just invest in stocks immediately, assuming that we are comfortable with the margin of safety at that point in time. More of than not, procrastination can be worse than bad timing. Just waiting for the price to drop by that 0.5c may just have cost you that 2 or 3 bagger. Lastly, one of the oldest yet safest methods would probably still be using a dollar cost averaging method, which in the long run would still perform relatively well.

Accounting Fraud – A Common Theme

Value investors are constantly sourcing for undervalued companies in every possible way, setting our filters to help us screen out that initial list of companies. I believe many out there would agree that majority of these undervalued gems would come from Asia, Chinese shares in particular, be it A-shares, P-chips or S-chips. However, shares are never undervalued for no apparent reason. These Chinese shares have fallen out of favor given the numerous corporate scandals.

Back in 2006, when China initially opened her doors, S-chips were investor’s darlings, where we see companies like Fibrechem Technologies having a run up in prices. However, such enthusiasm quickly faded as earnings started falling short of estimates. Many have had their fingers burnt when these share prices plummeted when problems such as accounting frauds and defaults started surfacing. Personally, I have witnessed friends having all their money locked in such shares and unable to exit due to the stocks getting suspended.


With this growing fear that Chinese companies will just disappear when their over inflated sales figures, empty coffers and huge debts comes to light, it is no wonder that there are so many Chinese companies trading at such cheap valuations. Just applying a net-net filter for the Singapore Market, 65.5% of the counters are China companies.

Talking to my colleagues in Shanghai, many have admitted that they too suffered losses in the Chinese stock market due to Chinese companies cooking their books and have ever since stopped investing in the stock market. In my opinion, many have decided to not touch any China related stocks to avoid any possible risks, given the difficulty to differentiate which are the good ones and which are the black sheep.


However, should we value investors just give up on all Chinese stocks and pass up on discovering hidden gems like Sino Grandness? Given how such stocks were able to pass the audit checks of reputable audit firms, many would be thinking, what then can we retail investors do? Talking to auditors from the Big 4, I do believe that it is definitely not easy for us retail investors to spot accounting frauds. However, this does not mean that it is impossible. Over the years, we would notice the trends and similarities in companies that have been suspected and found for corporate frauds.


While I may have presented common themes amongst Chinese companies found of fraud, it is not some hard and fast rule but merely a guideline for us to use when investing. Nonetheless, only invest in companies that you are able to feel comfortable with.

Disclaimer: The author is long T4B.SI

CDW Holdings

cdwCDW Holding Limited is a Japanese-managed precision components specialist serving the global market focusing on the production and supply of niche precision components for mobile communication equipment, gamebox entertainment equipment, consumer and IT equipment, office equipment and electrical appliances. Being a reliable outsourcing partner with Japanese precision, CDW Holdings has grown from a private trading company in Hong Kong back in 1991 to what it is today.

Before I begin my analysis, all figures are in USD.

Fundamental Analysis:

(I)              Earnings:

cdw_isThe company is split into 3 business divisions, namely LCD Backlight Unit, LCD Parts & Accessories and Office Automation, with the LCD Backlight Unit being their core business segment taking up two-thirds of their revenue. Within their LCD Backlight Unit, it can be further split into two segments – Backlight Units for Handsets (mainly smartphones) and Gamesets (including digital cameras and global positioning systems for automobiles). While their LCD Backlight Unit is their core business segment, the company is focused on the production of backlight units for gamesets compared to handsets.

Over the years, the company has been performing relatively well, keeping gross profit margins consistent yet increasing their net profit margins. This reflects how management has been effectively managing operating expenses through methods such as vertical integration, evident by the recent acquisition of Mt Wuxi. In FY2013, we observe the dip in revenue due to their major customer starting to wind down orders for phased out products. In terms of the LCD Parts & Accessories, we see sales declining by approximately 40%, which is the main reason for the 10% decrease in revenue. The LCD Backlight Unit remained relatively stable due to their major customer releasing new models and maintaining order volumes in 2H2013. While for the Office Automation, their smallest division recorded a 4.1% increase in sales. This is attributable to the company restructuring this division, consulting with their customers, eliminating loss making products and commencing production of higher margin and profitable ones. While gross profits have declined in FY2013, net profits remained relatively stable due to 2 one off gains – disposal of the Suzhou Plant and the USD2mn gain on the acquisition of Mt Wuxi.

(II)              Balance Sheet & Cash Flows:

cdw_bsCDW Holding’s balance sheet is relatively clean with minimal debt, with cash increasing year on year. As of 1Q2014, the company’s cash position has increased to USD64mn, increasing its net cash position to USD55mn, a 2.3% premium over its market capitalization. Given how management has been quite ambiguous regarding who their major client is in their Annual Reports, the cash conversion cycle might be something that we have to pay close attention to. However, as of date, I do not think there is anything to worry about.

(III)              Financial Ratios:

cdw_ratioQualitative Analysis:

(I)              Business:

Gamesets being the company’s key revenue driver is heading downwards and it might not be something temporary given how the technology landscape is changing. From the images on their website, I am assuming that one of their customers would be Nintendo and we all know that Nintendo isn’t the Nintendo of the past anymore. Days where every kid owned a GameBoy or what they call Nintendo 3DS now is no longer relevant today. Today, we see strong competition such as tablets and smartphones taking over the role of gamesets be it in terms of Gaming/Camera/GPS. Looking at Nintendo, not only has their projections been off lately, they have been way off. Nintendo’s prediction of 18mn 3DS handhelds fell short of actual sale of 12.24mn, reflecting the declining of such gaming products.

“We already witness the effects of changing consumer behavior in the technology space. With advances in smartphone technology and increasing consumer preference for smartphones over other handheld devices for gaming, photo-taking and global positioning capability, the demand for gamesets is on the decline…we do not think the reduced orders for gamesets is simply temporary but indicative of a larger, permanent trend,” an abstract from AR2013.

Screen Shot 2014-07-13 at 6.52.07 pmTracking the production of Backlight Units for both Handsets and Gamesets, it is indeed true that the production of gamesets have been on the downtrend, while handsets have been slowly growing. Additionally, it is important to note how production is greatly skewed towards the production of gamesets.

(II)              Economic Moat:

Looking at the consistency in gross margins, I would say that the company enjoys a relatively sizable economic moat. Furthermore, with only a 3% swing between the high and low gross margin values, it is a relatively tight range, showing how the company is able to maintain its relationships with her customers and suppliers.

Furthermore, in terms of production of gamesets, they are a key supplier in the wake of the reduction in number of suppliers, as abstracted from AR2012. While the gamesets are on a downward trend, it is still evident that the company commands a strong economic moat in withstanding competition, economic cycles and maintaining itself.


cdw_valuation cdw_valuation2At the current market price of SGD0.143, which translates to USD0.113 the company is definitely trading at low valuation multiples. With a P/E Ratio of 4.72, EV/EBITDA of -2.12 and normalized FCF yield of 13.6% definitely does indicate that the company is undervalued. Furthermore, if we were to base our calculations of Graham’s version of net-net, the company would fulfil it as well.


CDW Holdings is an undervalued company backed with solid financials and fundamentals. However, the company has not indicated any plans on how they plan to tide through this difficult period, especially how it is not a temporary issue. Putting myself in management shoes, I would start focusing more capital in strengthening my production of backlight units for handset, given the current growth in the smartphone industry. However, I am no expert with regards to this and perhaps it is more complicated than just strengthening their production but difficulty in supplying to companies on the scale of Samsung, Apple and Xiaomi. Given how such key concerns not being addressed, at current prices, it does not offer a wide enough margin of safety for us to invest in it.

Disclosure: The authors have no vested interest in D38.SI

Why Growth Is Not Always Good

As a value investor, I find the overemphasis on growth to be rather unsettling; it is very common to see analysts place a target price based almost entirely on earnings growth, eking out an unremarkable 5 to 10 percent capital yield gain as a call to buy a particular stock. I am currently reading a book – Value Investing: From Graham to Buffett and Beyond and it raised a very interesting point that growth may not even be necessarily beneficial for shareholders.

Excerpts from the  book

Earnings Power Value

The traditional Graham and Dodd earnings assumptions are (1) that current earnings, properly adjusted, correspond to sustainable levels of cash flow and (2) that this earnings level remains constant for the indefinite future. Under these assumptions, the equation for the earnings power value (EPV) of a company is EPV = Adjusted Earnings x 1/R where R is the current cost of capital.

More importantly, there is an important and close connection between the EPV of a firm and its strategic situation, and the line of connection runs through the reproduction cost of the assets.  The relation between earnings, and hence growth, and the reproduction cost of assets is an aspect not commonly examined by investors.

Three Scenarios of Growth

When we consider economically viable industries, there are three possible scenarios.

In the first, the firm’s EPV may fall substantially below the reproduction value of its assets. In this case, the management is not using the assets to produce the level of earnings that it should. The cure is to make changes in what the management is doing.

In the second, the EPV and the asset value are more or less equal. This is the situation we would expect to see in industries where there are no competitive advantages. The return these companies earn on the capital invested in them just equals the cost of acquiring that capital, and there is nothing left over for the previous investors. Thus, the EPV that equals the asset value defines the intrinsic value of the company, regardless of its growth rate in the future.

In the third situation, if the EPV is significantly higher than reproduction costs of the assets, then we are looking at an industry setting in which there must be strong barriers to entry. Firms within the barriers will earn more on their assets than will firms exposed to the entrant of new competitors in their industries.  For the EPV to hold up, the barriers to entry must be sustainable at the current elvel for the indefinite future.

Difference between EPV and Asset Value

The difference between the EPV and the asset value is the value of the franchise enjoyed by the company in question. Competitive advantages enjoyed by incumbent firms constitute barriers to entry that protect the incumbents from profit-eroding competition. These advantages and barriers are responsible for the firm’s franchise. The defining character of a franchise is that it enables a firm to earn more than it needs to pay for the investments that fund its asset. The EPV is greater than the asset value; the difference between the two, as we said, is the value of the franchise. Therefore, the intrinsic value of a firm is either the reproduction costs of the assets, which should equal the EPV, or those assets plus the competitive advantages of the firm that underlie its franchise.

So when is growth bad?

Under many commonly encountered strategic situations, growth in sales and even growth in earnings add nothing to a firm’s intrinsic value.  As we explained earlier, growth on a level economic playing field creates no value.

Growth in sales that finds its way to net income would seem to imply that there is more money available to investors. But growth generally has to be supported by additional assets, more receivables, more inventories, more plant and equipment. These extra assets that are not offset by higher spontaneous liabilities have to be funded by extra investment, whether from retained earnings, new borrowings, or sales of additional shares. That cuts into the amount of cash that can be distributed and thereby reduces the value of the firm. For firms that are not protected by barriers to entry, the new investment produces returns that are just enough to offset the cost of the net investment, resulting in zero net gain.

When EPV is equal to the replacement value of assets, a $1 million investment for example, should produce an additional $1 million in adjusted earnings. Nothing has been value-added to the amount and as a result, intrinsic value does not increase because it is as good as changing a dollar bill for another dollar bill.  For firms operating at a competitive disadvantage, additional growth will actually destroy value (think of it as paying a dollar for fifty cents).

My 2 cents – what does this mean to an investor?

Whenever I read a book, the chief question that hangs in my mind will inevitably be – how do I apply this to my analysis? To me, a mix of practicality and theory would provide the best value for fundamental analysis (contrast this with the concept of beta). While determination of the replacement value of assets requires several adjustments and calculations which I have yet to cover in my reading, I am apprehensive of the degree of knowledge that us retail investors can gather for an estimate of replacement value.

Nevertheless, the insight put forth by the book does seem valid to me and an alternative method that I am I considering would be to compare the 5-year CAGR of CAPEX/Operating Cash Flow (OCF) against 5-year CAGR of OCF. Capital expenditure is essentially the amount of reinvestment made into the business by the company; when CAPEX/OCF growth exceeds OCF growth it means that every additional of reinvestment is generating less than a dollar of additional cash. The idea here is that if CAPEX/OCF growth significantly exceeds OCF growth, it may be a cause for concern. Be it due to diseconomies of scales or what not, under such a scenario, shareholders would be better off receiving the additional CAPEX as dividends.

In employing such a method, one should also be aware of its limitations in order to make a sound judgement. Firstly, there is might be a time lag between capital expenditure and the benefits of it depending on the nature of capital expenditure. You don’t have to be an Einstein to know that it takes a few years for a factory to be built and using a 5-year CAGR is meant to reduce the impact of timeliness. Secondly, CAPEX only increases supply-side potential. The underlying assumption of using the 5-year CAGR of OCF is that there is sufficient demand in market to meet the increased supply. When there is insufficient demand, it would be difficult to conclude strictly that a dollar of CAPEX yields less than a dollar in cash. Of course, the nature of the lack of demand – cyclical or non-cyclical is important for your judgement. Cyclical falls beyond management control may be short term and do not imply that growth is bad. Non-cyclical ones indicate poor management and more cash should be returned to investors rather than be used for expansion.

To conclude, this episode reminds us that as fundamental analysts, there are boundless opportunities for critical thinking and evaluation, for even something so typified as the quintessential quality of stocks can have another side to it. Who knows what else we have left out?

Market Valuations

Many are familiar with market valuation indicators such as trailing, median P/E ratio, P/B and dividend/price ratio. In this article, I am not explaining the use of such indicators but wanted to introduce one that is relatively not known to many these days. Personally, I only found out about it recently, given my preference of using the long favored market valuation ratio, one even Warren Buffett pointed out to be ‘probably the best single measure of where valuations stand at any given moment.’ That would be the ratio of Total Market Capitalization to US GDP (TMC/GDP), which would stand at approximately 1.241 as of today, indicating that markets are significantly overvalued.

Everyone would be familiar with the term ‘Net-Net’ coined by the great Benjamin Graham, which just means to a company being priced below the value of its current assets less all liabilities. While we understand the implications of a company being a net-net, what are the implications when used on a market level?

Based on research done, just from the number of net-net companies compared to the S&P 500 Return, we are able to have a feel of the valuation of the market.

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From the research conducted by Graham Theodore & Co. Ltd., we are able to observe the inverse relation between the number of net-nets in the market and the S&P 500 Return. The greater the number of net-nets, it would indicate a more bearish market, with market valuations on the low side and vice versa. With that said, looking at the current market today (NYSE MKT LLC, NYSE, NASDAQ) there are only a total of 59 net-net companies and the average annualized returns from 2012 to present would be approximately 21%. Compared to the initially mentioned TMC/GDP ratio, it would indicate that market valuations are indeed overvalued.

Looking at past history, the highest point TMC/GDP ever reached was 1.48 during the technology bubble in 2000. What does it mean for us going forward now? I am not saying that we should all start winding down our portfolios and sit on cash, however, it would be best that we hold a larger proportion of our portfolios in cash and consider realizing profits for companies nearing their fair value.