Japan’s Top Toilet Maker Is ‘Undervalued, Overlooked’ AI Play Over ‘Cryogenic Etching’ Technology, Activist Investor Says

Japan’s top toilet maker, Toto, is an undervalued AI play according to activist investment fund Palliser Capital. 

The UK-based fund sent a letter to Toto’s board asking for more disclosure over its advanced ceramics segment, which produces electrostatic chucks used in NAND manufacturing – specifically for a process called cryogenic etching. Toto’s chuck technology uses ceramics designed to remain stable at very low temperatures, which can help firmly secure silicon wafers during chip production. 

According to Palliser, Toto is “the most undervalued and overlooked AI memory beneficiary,” and says that the Japanese company has a five-year competitive “moat” before other companies can catch up, adding that the advanced ceramics segment could deliver 30% or more revenue growth over the next few years, “driven by Nand upgrade cycle and stable replacement demand.”

Palliser also says that Toto is doing a terrible job of explaining the importance of electrostatic chucks to shareholders, and too little of the company’s planned investment was devoted to growing the highly profitable segment. 

The activist investor began its involvement with Toto roughly six months ago and is a top-20 shareholder in the business, according to the Financial Times. The fund’s other investments include holdings in property company Tokyo Tatemono, Keisei Electric Railway, which runs trains in Tokyo, and Japan Post Holdings.

Palliser thinks Toto shares could rise over 55% if it expands its advanced ceramics business, sold cross-shareholdings, and used its $496 million (¥76bn) in net cash better. 

Toto is best known for its heated toilet seats and “Washlet” bidet features, however Palliser says they’ve “quietly evolved from a traditional domestic sanitary ware champion into a rising powerhouse in advanced ceramics for semiconductor manufacturing.”

Shares in the company have already risen over 60% in the past year. 

In late January, Goldman upgraded Toto from Neutral to Buy – writing “We expect significant profit growth in its new domain business segment (which mainly
produces electrostatic chucks for NAND and accounts for 55% of Toto’s operating profits) on the back of increased demand for NAND associated with the build-out of AI infrastructure and a tight supply/demand environment.”