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Investors underestimating Rakuten, says CEO Mikitani

Japanese e-commerce group says its focus is on expansion, not profit

Rakuten CEO Hiroshi Mikitani briefs reporters about the company's earnings results in the Tokyo head office Tuesday.

TOKYO -- The chief executive of Japanese e-commerce and internet conglomerate Rakuten complained on Tuesday that the stock market was underestimating his company's prospects, after reporting a 2.9-fold increase in net profit for the year ended December.

"Our real strength is not reflected in the current share price," founding Chairman and CEO Hiroshi Mikitani complained during an earnings announcement but declined to make further comment.

Rakuten shares closed 0.5% lower at 934.9 yen. Since touching a high of 2,395 yen in April 2015, they have been on a steady downward march, losing 61% of their value.

The company, whose operations range from e-commerce and online video streaming to securities and banking services, reported an annual net profit of 110 billion yen ($ 1.02 billion), almost three times that for 2016, when revenue surged 21% to 944 billion yen.

The bottom line was lifted in part by a 42.6 million yen in profit Rakuten recorded on its securities holdings, including those for overseas ride-sharing business.

Mikitani emphasized that the internet business is still in the growth phase and that the company needs to focus on expansion, not on profit generation. In the past couple of months, the company announced a slew of deals, including a partnership with U.S. retailer Walmart to start a direct delivery service in Japan, a plan to acquire Asahi Fire & Marine Insurance, and entry into mobile phone services.

"The most important point I want to make is that it is still time to expand our ecosystem of services," Mikitani told the press conference. "We have to be one of the main internet players when the dust settles on the internet revolution."

Mikitani voiced confidence about gaining a foothold in the smartphone market, following its surprise announcement in December that it will build its own mobile network and become the fourth Japanese carrier after NTT DoCoMo, KDDI and SoftBank Group. Mikitani estimates that a nationwide network can be built at a cost of some 600 billion yen. About half of the investment, or 300 billion yen, would go to developing outdoor relay stations.

The investment is expected to be financed through borrowing, with the service expected to begin next year.

"The mobile phone business will grow into an anchor of the Rakuten ecosystem," along with its online financial services, Mikitani predicted.

To compete against Amazon in the Japanese e-commerce market, Mikitani said Rakuten plans to strengthen its logistics and delivery operations.

Currently, the company is focused on running the market place, leaving sellers to take care of arranging the delivery of the goods they have sold. Going forward, Rakuten will take a more hands-on approach, directly handling warehousing and delivery operations, monitoring the delivery process, to keep buyers up-to-date about the status of their purchases.

Rakuten has three logistics facilities around Tokyo and Osaka. To launch a nationwide distribution service, Mikitani said the company will build seven more such facilities across Japan.

While Rakuten competes with Amazon in Japan, it has yet to establish a presence as an e-commerce player overseas.

In the U.S., the company operates a retail site and loyalty program operator Ebates. It also runs such services as free call and chat app Viber and video streaming service Rakuten TV.

"Overseas operations have entered a phase of generating profit, starting in the U.S.," Mikitani declared.

In 2017, Rakuten made about 80% of its revenue in Japan, and the remainder overseas, mostly in the U.S. The lack of disclosure on the regional breakdown of operating profits could mean that non-Japan business is yet to become a substantial contributor to its bottom line.

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