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Crayfish in the Sea of IPOs: Play Off the Japanese Internet Market

The new email and Web-hosting firm is creating buzz as a way to play the strong growth in the Internet in Japan.

TOKYO -- Investors waiting for the next hot Asian Internet stock may think about casting their net in the direction of

Crayfish

, a Japanese email service that will list next week both in the U.S. and Japan.

While unlikely to grab headlines such as those concerning PDA maker

Palm's

debut

(PALM)

, Crayfish should nonetheless cause a stir with the deal, which is expected to raise $115 million. The company is in a niche sector: It offers email and Web-hosting services to small and midsize businesses, which are often overlooked by the giant corporations identified with fusty Japan Inc. Since its founding five years ago, it has attracted some 600 firms and now boasts about 45,000 accounts. And it has a widely recognized brand name in Japan with its "hitmail" service, which allows clients to create their own domains.

Almost as enticing is its pedigree. Crayfish is backed by mobile-phone marketer-cum-Internet investment firm,

Hikari Tsushin

, which vies with titan

Softbank

as Japan's premier Internet play. Hikari Tsushin, whose shares have risen almost 300% since September, owns 50.1% of Crayfish.

For American investors, however, timing may prove the most appealing aspect of this IPO because the company will list in the U.S. before it does so in Japan. On Tuesday, Crayfish will offer 870 million American Depository Shares, each of which is expected to fetch between $12 to $14 per share on the

Nasdaq

under the ticker

CRFH

. That will be followed on Friday with a listing on the newly launched high-tech

Mothers

board of the

Tokyo Stock Exchange

.

Both Crayfish and Hikari Tsushin are excellent ways to play the expected growth of the Internet in Japan, where about 14% of the population has access to the Web as opposed to 37% in the U.S., fund managers say. Despite its worst economic downturn in the postwar era, Japan has seen Internet penetration grow at around 6% and Japanese Web surfers are increasingly turning to online services for banking and shopping.

"Hikari Tsushin is a play off the Internet and Crayfish is a play off of market penetration in the Internet," says Vincent Willyard, portfolio manager for

Duncan-Hurst Capital Management's

$41 million

(DHIIX)

International Growth Fund, which is up 37% so far this year. The fund, which will participate in the offering, has 2.8% holdings in Hikari Tsushin, its second-largest position.

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The local press makes Crayfish's 26-year-old founder and chief executive Isao Matsushima sound like a representative of the new Japanese dream. He started the company after dropping out of college. Crayfish -- whose senior management is all under the age of 30 -- hooked up with Hikari Tsushin in 1998 and the company grew from a little operation employing its three founders to a staff of more than 70.

Not unlike other dot-com start-ups, Crayfish has yet to report profits. During the October-December quarter, the company suffered a pretax loss of 465.76 million yen ($4.33 million) and a net loss of 472.01 million yen on sales of 939.88 million yen.

Neither representatives of Crayfish nor its underwriters

Nomura Securities

and

Morgan Stanley Dean Witter

would comment for this story. Hikari Tsushin officials were similarly shy.

If Crayfish follows the path of the three previous stocks listed on the Mothers board, investors will likely be happy.

Internet Research Institute

, a Net systems integrator, opened at 53 million yen per share; its IPO price was 11.7 million yen.

Liquid Audio Japan

doubled in price after opening, and the newest addition,

Met's

, a graphics software firm, tripled on its first day of trading to 22 million yen. (

TSC

took a look at the Mothers board in

issue back in December, when it launched.)

The Nasdaq listing follows in the wake of Asian successes such as

Internet Initiative Japan

(IIJI)

,

Korea Thrunet

(KOREA)

and

Chinadotcom

(CHINA)

, which went public last year.

Analysts warn that part of the reason Crayfish will likely jump at the open is liquidity -- or the lack thereof. In Tokyo, Crayfish is selling only about 1,870 shares at an expected price of between 7.2 million and 8.3 million yen a pop. And tech fund managers are expected to scramble over each other to snap it up for their portfolios. If they should suddenly decide to get out, shares could fall quickly.

In the meantime, however, optimism sways the day. For investors who missed Hikari Tsushin, Crayfish may be the next way to get in on the Japanese Internet market.