Tokyo, Japan – Toto, the Japanese manufacturer best known for its innovative toilet technology, is attracting attention from an unlikely source: activist investors betting on the company’s crucial, yet largely unrecognized, role in the artificial intelligence supply chain. UK-based Palliser Capital has taken a stake in the company and is pushing for greater transparency regarding its advanced ceramics business, arguing it is significantly undervalued.
While globally recognized for its “Washlet” bidet features and heated toilet seats, Toto has quietly become a key supplier of electrostatic chucks, essential components in the manufacturing of NAND memory chips. These chips are experiencing soaring demand due to the rapid expansion of AI infrastructure. Palliser Capital believes Toto is “the most undervalued and overlooked AI memory beneficiary,” according to documents sent to the company’s board last week.
The advanced ceramics segment currently generates 40 percent of Toto’s operating profit. The company’s expertise in ceramics, honed over decades of toilet manufacturing, allows it to produce electrostatic chucks that maintain stability at extremely low temperatures – a critical requirement for cryogenic etching, a process becoming increasingly important as memory chips become more layered and complex. Toto has been manufacturing these chucks since the 1980s, but their importance has only recently begun to translate into significant financial gains.
The surge in demand for memory chips, driven by AI applications, has already begun to reflect in Toto’s stock performance. Shares rose by more than 60 percent over the past year, including a 5 percent jump on , following reports of Palliser Capital’s investment. This followed a previous 10 percent increase last month after Goldman Sachs analysts upgraded the stock, citing the potential for profit growth from the chuck-making business.
Palliser Capital’s campaign centers on the belief that Toto is not adequately communicating the value of its advanced ceramics business to investors. The fund argues that increased disclosure and a more focused investment strategy could unlock a further 55 percent upside in the company’s share price. Specifically, Palliser suggests Toto should streamline its operations by selling cross-shareholdings and more efficiently utilizing its ¥76 billion (approximately $496 million) in net cash.
The activist fund, founded by a former senior figure at Elliott Management, has been increasingly active in Japanese shareholder activism, a trend that has gained momentum in recent years. Palliser currently ranks among Toto’s top 20 shareholders and also holds stakes in Tokyo Tatemono, Keisei Electric Railway, and Japan Post Holdings.
Toto’s success in the chip materials market isn’t isolated. Other Japanese companies with seemingly unrelated core businesses are also benefiting from the AI boom. Ajinomoto, primarily known for its food products, leverages its expertise in umami flavorings to produce resin used as insulation material between chips and motherboards, demonstrating the unexpected connections within the global technology supply chain.
Analysts at Goldman Sachs echo Palliser’s assessment of Toto’s potential. Their recent upgrade of the stock highlighted expectations for continued growth driven by expanding investment in AI data centers globally. Palliser believes Toto possesses a competitive “moat” of approximately five years before competitors can replicate its advanced ceramics technology, allowing for projected revenue growth of 30 percent or more in the next two years.
Despite the positive outlook, Toto has faced challenges in recent years. Over the past five years, its shares have fallen by around 17 percent, contrasting sharply with the 93 percent gain in Japan’s Topix index. This underperformance underscores Palliser Capital’s argument that the market has yet to fully recognize the company’s potential, particularly in the context of the burgeoning AI industry.
Both Palliser Capital and Toto declined to comment on the matter, leaving the market to interpret the implications of this activist investment and the potential for a significant shift in the company’s strategy. The situation highlights the evolving landscape of the technology supply chain and the unexpected beneficiaries of the AI revolution.
