Toto, world famous for their toilets with a trickle that we usually miss so much when we return from Japan, has been quietly manufacturing key components for the semiconductor industry for decades. Just like account Financial Times, an activist fund has focused on that part of its business, and the market is starting to pay attention.
What has happened. Palliser Capital, a UK-based activist fund, has sent a letter to Toto’s board of directors arguing that the advanced ceramics the company works on are being ignored and underestimated by the market. The fund, which owns a stake among the 20 largest in the company, according to share from FT, calls Toto “the most underrated and overlooked AI memory beneficiary.”
What is important. Toto is not just a bathroom company. Since 1988 it has been manufacturing the so-called ‘electrostatic chucks’ in series.‘ (electrostatic jaws), high-precision ceramic components used in the manufacture of NAND memory chips to hold silicon wafers during the production process, controlling temperature and avoiding contamination.
This business, which they fit within their “advanced ceramics” division, already represents around 42% of the company’s total operating profit, according to data from Bloomberg.
The connection with AI. He data center boom for artificial intelligence has skyrocketed the demand for memory chips. Companies like Meta, Amazon or large memory manufacturers (SK Hynix, Samsung, Kioxia) are accelerating their production to face a widespread shortage. That translates into more demand for the components that Toto manufactures.
The company’s ceramic technology is also specially adapted for cryogenic etching, a process that is expected to gain popularity as memory chips become more complex and layered.
Business tips. According to share The fund also criticizes that Toto is not explaining well to investors the importance of this segment and that the allocation of internal capital is not prioritizing this lucrative sector. The fund proposes that the company expand its ceramics business, sell cross-stakes in other companies and make better use of its 76 billion yen in cash (about $496 million). If Toto did all that, Palliser estimates the stock could rise more than 55%.
The market had already started to move. Toto shares have accumulated a revaluation of more than 60% in the last year. Just like share Bloomberg, at the end of January, after the support of Goldman Sachs, which raised the value to buy pointing to the memory shortage as a tailwind, the stock rose 11% in a single day, its biggest rise in five years.
Be careful with the warnings. The idea that Toto would have that competitive advantage before other competitors can be at that level comes from Palliser himself, who has an obvious interest in making that narrative credible. Tom’s Hardware points out that while electrostatic jaws play a real role in advanced manufacturing processes, whether that translates into sustained growth still depends in part on large memory manufacturers committing to expanding production and, for now, they are being cautious faced with the risk of oversupply if the AI market cools.
The phenomenon is not exclusive to Toto. Japan has a long history in chip production, which has led companies with very different profiles to develop businesses related to semiconductors almost without anyone noticing. Just like share Bloomberg, Ajinomoto, known for its broths and its mastery of umami, makes insulating films for chips based on its expertise with amino acids. Kao, a cosmetics company, has a silicon wafer cleaning business. The AI business is revaluing companies that, a priori, had nothing to do with it. And Toto is the latest example of this.
Cover image | Taylor Vick and Upgraded Points
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