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Internet Initiative Japan (NASDAQ:IIJI) trades on the Tokyo Stock Exchange 1st Section now, but continues to be overlooked and has actually given up recent gains, making for a good buying opportunity. John Christy, editor of The Forbes International Investment Report, made a bull case recently in a summary provided by The

First, IIJ closed down 0.74% at ¥401,000 ($8.46 ADR equiv. at ¥118.55/$1) today in Tokyo on light volume -- its slowest trading day since Aug. 29.

It has now lost ¥30,000 ($0.63 in terms of its ADR ratio) since it peaked on the 13th following news its listing would be transferred from the Tokyo Stock Exchange's MOTHERS market to the TOPIX 1st Section.

Prior to news of its listing transfer, Lehman Brothers initiated coverage at "Equal-weight" on Nov. 29. IIJ traded at/around ¥385,000 ($8.12) then. I would not expect it to trade lower than that, or the $8 level I wrote of in an earlier post (based on forex rates).

Now, a look at what Forbes' Christy had to say about IIJ.

As I've been pointing out a lot in my coverage of Japan lately, Japanese small caps continue to lag. This will likely continue, at least until the yen strengthens with follow-on Bank of Japan rate hikes. Christy sees '07 as a turning point, saying:

"International markets have done extremely well across the board and investors are looking for pockets of opportunity."

Christy adds:

"In particular, hedge funds have been sifting through the rubble in Japanese small caps. These companies tend to be more profitable, more entrepreneurial -- and much cheaper -- than their large-cap peers."

Speaking specifically about IIJ, he cites strong demand for its IT outsourcing services, which helped IIJ double its net income last quarter. Furthermore, he sees IIJ's expertise in network services and solutions as being in continued demand amidst Japan's IT restructuring.

Christy calls IIJ speculative and comments it has been an extremely volatile stock. I would argue about the "speculative" label, but the volatility has and continues to exist. He is right in saying its listing transfer will boost visibility. I think it is only a matter of time before both analyst coverage and trading volume increase. Christy concludes saying:

"... as long as IIJI continues to deliver strong profit growth, there will be plenty of upside."

Below is my coverage of IIJ over the past month.

Dec. 21

... I am looking to add to my position in Internet Initiative Japan (IIJI). I believe its lack of analyst coverage in Japan, and a failure to understand the importance of its business and positioning makes its shares undervalued (not to mention its president recently announced target growth of 15% and a possibility of a dividend) and represents a great opportunity at these price levels. IIJ has pulled back after transferring its listing from the Tokyo Stock Exchange's MOTHERS market to the TOPIX 1st Section. I don't think it trades too much lower and can't imagine it trading below an ADR equivalent of $8, which would mean a complete reversal. In fact, even if there's news of a secondary offering, which would likely be accompanied by a share split, I don't think that puts any selling pressure on IIJ. It has such few shares outstanding and with a good chunk of its shares owned by entities of NTT and trading companies, it means there'd be a larger float for both institutional and individual investors. I wouldn't be surprised if NTT makes an offer to acquire the firm.

Dec. 15

Internet Initiative Japan (IIJI) went nowhere fast (it actually went down today) after its transfer from the Tokyo MOTHERS market for startups to the more respected TOPIX 1st section. This doesn't really bother me to the point that I want to sell and capture gains now. I admit it is disturbing that IIJ has virtually no following in Japan (partially perhaps its own fault since its share price is ¥425,000 ($3,602) per share ($9.00 ADR equiv.)

IIJ's trading volume dropped significantly today. I don't think too many shareholders want to sell, especially with news of a dividend initiation next March, improving financials and M&A opportunities. The index fund related buying should play out over time. Its weighting is minor, but index buying should definitely provide support. I plan to add to my position on any dips. I'm also looking at call options of various expirations; I already own some calls.

Dec. 12

Lastly, let's revisit Internet Initiative Japan (IIJI). This is a neat IT, small cap play that is basically under the radar in Japan, but well-positioned for the expansion of network/data connectivity and security, ready to benefit from IT upgrades across Japan. After trading lower on Friday and yesterday in a classic "buy on the rumor," and "sell on the news," its ordinary shares (Tokyo MOTHERS: 3774) managed to add nearly 2.5% today closing at ¥423,000 ($9.04 ADR equiv. at ¥117/$1).

I think with its transfer to the TOPIX, which is supposed to transpire Thursday, it will receive much improved coverage, and hopefully (eventually) splits its shares. In the meantime, management has said it won't be issuing new shares, so with only 204k shares outstanding it's expected there will be strong demand as index funds begin purchasing. The Nikkei Kinyu Newspaper reported there's a big possibility of IIJ initiating a dividend at the end of this fiscal (next March). It also said IIJ's president is targeting 15% annual revenue growth.

Dec. 11

My only stake in Japan-related investments at the moment is in two smaller-cap plays, Internet Initiative Japan (IIJI) and NIS Group (NIS), in addition to a broad Japan mutual fund. Both IIJI and NIS were on a nice run, but it seems a combination of uncertainty and profit taking have slowed the enthusiasm, likely only temporarily.

IIJI received big news late last week that it will be moving from the Tokyo Stock Exchange's MOTHERS market to the 1st Section of the TOPIX. For some reason there was downward pressure on its shares today in spite of IIJI commenting that it will not be issuing shares or implementing a stock split. This is supposed to be good news -- as TOPIX-related index funds should add IIJI later this week -- since it only has 204k shares outstanding. IIJI is a long-term holding for me. Lehman recently initiated coverage at "equal-weight." And I saw that Daiwa continues to give it its highest rating "1" and I believe it gave it a ¥500,000 ($10.68 ADR equiv. at ¥117/$1) target share price. It closed at ¥413,000 ($8.82 ADR equiv.) today.

Internet Initiative Japan (IIJ) 1-year chart:


Disclosure: The author owns shares of NIS Group and IIJ and owns IIJ call options.

Source: Forbes Int'l Investment Report: IIJ Is Top Speculative Japan Play in '07