Japan Leisure Hotels (LSE: JPLH)

caters for the significant demand in Japan for short-stay hotel facilities. The density of the urban population puts a premium on space and privacy.
These hotels attract a range of clientele from respectable married couples to those discreetly pursuing more illicit liaisons and backpacking tourists at the cheap end of the market.

There are around 25,000 such hotels in Japan, serving up to 2 million customers each day. The sector has proved remarkably recession-resilient. Annual turnover is estimated at £17bn and the average daily occupancy rate of around 250% is something regular hotels can only dream of.

It's a fragmented industry, with 90% of the hotels in chains of five or less, and since the bubble economy of the 1980s many have suffered from lack of investment.

Japan Leisure Hotels has seen the opportunity to buy up these distressed assets, invest in refurbishment and reap the rewards of what are highly cash-generative businesses.

The management

The company has a board of three non-executive directors, headed by Chairman Alan Clifton. Clifton was previously Managing Director of Morley Fund Management, the asset management arm of insurance giant Aviva.

He is also currently the chairman of investment trusts Schroder UK Growth (LSE: SDU) and JPMorgan Fleming Japanese Smaller Companies (LSE: JPS), and serves as a director of a number of other investment companies, including Macau Property Opportunities (LSE: MPO)

The company employs an asset manager, New Perspective, whose directors are ex-Credit Suisse and KPMG and who have considerable experience of doing business in Japan.

In short, then, a team combining good local knowledge with an appreciation知道，瞭解 of UK shareholder expectations.

The company

When the company floated in 2008 it hoped to raise £100m. The timing was unfortunate and gross proceeds of a placing ended up being just £3m at 50p a share. The market capitalisation on admission to AIM was £22m.

The company had to scale back its target of having 1,000 rooms under management in the first year. The company website, under the 'Investment Properties' tab, details the core portfolio of five hotels, which operate under the 'Bonita' brand at the premium end of the market.

Despite the current small size of the business, results for the year ending 31 December 2009, announced last week, confirm the viability of the business model.

Excellent cash generation will leave the company with net cash, even after the refurbishment and rebranding of a sixth hotel and the payment of a maiden interim dividend of 1p.

The dividend policy is to pay out all free cash flow. Analysts are forecasting dividends of 1.5p in 2010 and 2p in 2011, giving yields of 3.6% and 4.8%, respectively, at the current share price of 41.5p.

The shares are trading at a substantial discount to the year-end adjusted net asset value of 74p.

The future

A capital raising in order to purchase more hotels will doubtless be in the directors' minds. The disappointing original placing and a further aborted attempt last year are not exactly encouraging, but prospects have been considerably enhanced by the recent results and the pick-up in the global economy.

There's no room for Japan Leisure Hotels in my own portfolio -- which has an increasingly conservative tilt with the passing of the years -- but the company does look to have potential for a more speculative investor, or as a marginal holding for anyone with a very large portfolio of eclectic investments.

Of course, I need hardly say, it comes with all the usual risks of a microcap company.