Japan: one-trick ponies, exporters, yen, QE, EWJ, real estate, domestic demand; some sound conclusions


Value investors will still find excellent valuations in Japan despite the market’s gains over the past several weeks. As I say again, in my latest exclusive at Seeking Alpha, “Investing in Japan Beyond the Platitudes,” the most interesting opportunities are in domestic-demand small/mid-cap companies. I’ve received a number of messages asking about WisdomTree’s hedged Japan Equity fund (DXJ). Yes, DXJ has done well, much better than iShares Japan (EWJ), in this rally. However, I’m not a big fan of DXJ for some of the same reasons I don’t like EWJ. Over 270 portfolio holdings for DXJ and 300 for EWJ mean outside of  the top-few positions no one stock is really going to move the needle; the top holdings are not dissimilar from the benchmark indexes nor the one-trick pony mutual fund managers. Exporters are already cyclical and the demand/supply (selling) of their shares only makes them more cyclical — this is even more a concern should positions get closed en masse in DXJ given its smaller asset base that has surged only recently.

Finally, I don’t see the yen “blowing up” — it’s not as simple as some may wish or have been led to believe to see a currency like the yen or a country like Japan “blow up” in a straight line. Beware macro pontification coattailing. The great 2005 Nikkei rally saw a roughly 10% weakening of the yen. Overnight, Economy Minister Akira Amari warned excessive yen appreciation may benefit exporters but would hurt people’s livelihoods. The business press is concluding Minister Amari as having suggested the yen has weakened enough. In fact, too weak of a yen begins to hurt exporters if materials costs don’t start to decrease. In this sense, the input environment is quite different than ’05; ditto the strength of the global economy now vs. then.

IIJ: cutting edge Japanese IT company at dial-up prices


Internet Initiative Japan (IIJI) (3774) is being overlooked by the market of late after a run last year to a multi-year high. Poised for a record fiscal year (which ends in a couple weeks), no doubt 2012 – 2013 will prove to be even more impressive. See my write-up, which appears as an exclusive premium article on Seeking Alpha. Also, my just-released book, Investing in Japan, is now available on Amazon. Continue reading

Internet Initiative Japan: attractive value and growth


Internet Initiative Japan (IIJI) (Tokyo: 3774) is a longtime shareholding and is one that I intend to hold on to for the long haul. Following my “friendly” activist dialogue with the company beginning early last year, the company has subsequently raised its dividend four times by an aggregate 50%. And there is further potential to unlock value. Meantime, IIJ is executing quite well operationally and its outlook is the brightest I can remember. Please see my latest coverage of IIJ at Seeking Alpha, “Internet Initiative Japan: A Pure Play on Japanese Cloud Computing Growth.” There is a link within the article to my past coverage of IIJ, including my activism and ideas how to unlock value; you can also see my past articles here.

How I am voting Internet Initiative Japan’s proxy


A longtime shareholding on mine, Internet Initiative Japan (IIJI) (JP: 3774), is having its Annual Shareholder Meeting this Friday in Tokyo. I urge all ADR and Ordinary shareholders to submit their votes as soon as possible, but not later than this Thursday, 10:00 AM Eastern (NY) for ADR holders, or by Thursday, 11:59  PM Japan Standard Time for Ordinary shareholders. Also, please see my previous article detailing my activist work to-date with IIJ.

IIJ hit another 20-month high overnight in Tokyo, up 1.3% to ¥276,900 (ADR equiv. $7.65 at $1/¥90.5), although it traded as high as ¥288,900 in the afternoon session before giving back a good chunk of the gains into the market’s weak close. While IIJ’s stock has had a strong year, I remain convinced that its shares are still undervalued, due in some respects to management’s misuse of capital and the Board of Directors’ failure to unlock value, and in other respects primarily because of overly restrained IT spending in Japan. Continue reading

An update on my shareholder activism with Internet Initiative Japan


About 3 ½ months have passed since I sent my first letter and shareowner proposals in late-February to the Board of Directors of Internet Initiative Japan (IIJI) (JP: 3774), a leading ISP and related services (cloud computing, systems integration, etc.) in Japan. As a longtime shareholder (since 2006), my concerns included the company’s level of capital spending, its corresponding levels of depreciation, and its deteriorating returns on assets/equity/etc., the latter being partially suppressed by a large, low-yielding cash position. And my proposals involved items that a Board of Directors typically has more direct influence over (as opposed to my aforementioned concerns) such as stock splits, share repurchases, dividends, and shareholder say in significant non-core business investments. Continue reading

IIJ hits high on earnings beat, has much upside


Internet Initiative Japan (IIJI) (JP: 3774) is not a household name in the U.S., but it has carved out a niche in Japan in internet connectivity and related system services and outsourcing (essentially it is a high-tech ISP catering to businesses and government with growing potential in cloud computing and mobile access). Overnight in Tokyo it reported better-than-expected full-year earnings, forecast top and bottom-line growth in the current fiscal year ending next March (albeit on the soft/conservative side), hiked its dividend for the fiscal-year ended in March by 11% and is targeting an 11% hike for the current year’s dividend. IIJ surged in the afternoon session in Tokyo following its earnings release, reaching limit-up at ¥259,300 (ADR equivalent of $7.00) and closing at ¥245,000 ($6.61), compared its Nasdaq close $5.68 on Thursday. This is all good news, but it will likely get even better, much better, because IT investments in Japan have been largely held back, and IIJ’s board can take more of an initiative to enhance shareholder value, something for which I hope to be a catalyst. Continue reading

Taking initiative to enhance value of IIJ


Internet Initiative Japan (IIJI) (3774) is a Japanese internet service provider offering a full suite of connectivity and outsourcing services. It is a pioneer among Japanese internet-related companies, having originally listed its shares on the Nasdaq in 1999, before eventually listing in Tokyo (Mothers) in 2005 and later transitioning to Topix 1st Section.

At the end of February, I submitted a letter to the company’s chairman (Mr. Suzuki) and its other directors. While applauding them for their prior decision to repurchase shares, the timing of which coincided with the bottoming of IIJ’s stock, and also for maintaining the dividend, I voiced some concerns and submitted proposals that are either to be actioned or designated for resolution at the Annual Shareholders’ Meeting this June. IIJ’s Investor Relations Officer has been helpful and cordial, and has already forwarded my letter and proposals. Below, I will briefly outline my position.

Unfortunately, despite having listed in the U.S., making it to Topix-1, and having a reasonable level of awareness within commerce and government in Japan, IIJ remains a largely unknown company in the investment community. Since I’ve been a shareholder for a while now I am not pleased about this, but it in fact represents an opportunity.

A cursory review of IIJ’s financials will show that the company met some hard times in 2008 (fiscal year-end March ’09), as did most companies, but it remained profitable. However, given the weak economy in Japan and lingering deflation, 2009 (FYE 3/2010) is not looking as if it will be significantly better than 2008; that is, as revenues are forecast to be lower, although earnings are expected to rise about 20%, but still be only about a third of what they were between fiscal years 2006-2008. Meantime, IIJ is moving right along with capex, granted some of it is regarded as critical given the upgrade cycle of networking equipment. I have asked IIJ to review its capex/depreciation, while considering the models of Google and Amazon for cloud computing, an area, along with mobile connectivity, that represents great opportunity for the company.

One of my chief concerns relates to the level of capex and correspondingly, the heavy depreciation. Furthermore, the growth in assets, while it had led to top-line growth, it hasn’t brought an increase this year, and has not generated growth on the bottom-line for the past two years. To make matters worse, IIJ is sitting on a sizable pile of cash, nearly ¥8.5 billion ($94M) as of the most recent quarter’s end, compared to total assets of around ¥47 billion, and a market capitalization of around ¥40 billion (keep in mind that its shares are up about 25% in the past month). The company doesn’t have long-term debt, but it does utilize capital leases, which represent a “long-term” liability of ¥3.9 billion. IIJ has no working capital concerns whatsoever, and has access to very cheap bank lending facilities at a cost of capital under 2%.

My specific proposals involve:

I. A stock-split of the ordinary shares of at least 10:1, but preferably 100:1. Correspondingly, in light of the 400:1 ADR-to-Ordinary ratio and IIJ’s subsequent five-dollar per share ADSs, again I suggest a 100:1 ordinary split and a 1:4 ADR split. While stock splits don’t impact the fundamentals, they would most certainly help improve IIJ’s trading liquidity and improve its potential investor base.

II. Switch to a quarterly dividend payout schedule instead of biannually. I suggest this given it is common practice in the U.S. and the appreciation most shareholders will have for a more frequent payout.

II. Announce another stock buyback. I have already summarized IIJ’s cash position above. I regard IIJ as undervalued both based on a valuation of its assets and a return to at least the levels of profitability it achieved in the recent past. Use of cash for share repurchases is ideal considering IIJ’s recent low ROA (and ROE) and its foray into a non-core business (see below).

III. Allow shareholders to vote on any investment or acquisition in excess of ¥1 billion that does not involve IIJ’s core business related to internet connectivity and services. This proposal is prompted by its new ATM business. It has a majority stake in a business that places ATM’s in pachinko parlors (similar to how ATMs are placed in casinos). While this business may someday become profitable (I have asked for revenues/earnings guidance), it has accumulated losses to-date of over ¥1 billion, and it will need even more capital before all the thousands of ATMs are deployed.

One-year stock chart of IIJI:

Disclosure: The author owns shares of IIJ. Note this article does not constitute investment advice.