British activist investor Palliser Capital has identified Japanese bathroom giant TOTO as an "undervalued and overlooked" AI investment opportunity. The manufacturer, famous for its smart toilets, is securing a crucial position in the semiconductor supply chain through its advanced ceramics business.
Last week, Palliser Capital sent a letter to TOTO's board urging increased investment in the advanced ceramics division. This segment produces electrostatic chucks used in manufacturing NAND memory chips and currently contributes approximately 40% of TOTO's operating profit. With surging demand for memory chips from AI companies, this business is becoming a new growth engine for the firm.
Palliser Capital believes the company's share price could still rise by more than 55% if it expands its advanced ceramics operations and optimizes capital allocation.
Following news of Palliser's stake, TOTO's shares surged over 5% on Tuesday. The stock has already accumulated gains exceeding 60% over the past year.
Gold Sachs upgraded TOTO to a "buy" rating last month, citing expectations for sustained high growth driven by global AI data center investment expansion. This reflects a market reassessment of the traditional manufacturer's value within the semiconductor industry chain.
From Bathroom Champion to Key Semiconductor Supplier
While TOTO is globally renowned in Japan for its heated toilet seats and "Washlet" bidet functions, Palliser points out the company has "quietly evolved from a traditional domestic bathroom champion into an emerging leader in advanced ceramics for semiconductor manufacturing."
The company's electrostatic chuck technology uses ceramic materials that remain stable at extremely low temperatures, securely holding silicon wafers during chip production. This makes it highly relevant to low-temperature etching processes—a technology whose importance will continue to grow as memory chips become more layered and complex.
TOTO has leveraged ceramic expertise accumulated from toilet manufacturing to produce electrostatic chucks since the 1980s, but this business only began significant volume growth in recent years. Over recent months, substantial demand from AI-related companies has driven sharp price increases for memory chips, further elevating the market position of related equipment suppliers.
Five-Year Competitive Moat and Growth Outlook
Palliser estimates TOTO possesses a five-year competitive advantage in advanced ceramics, making it difficult for other companies to catch up in the short term. The fund projects this business could achieve revenue growth of 30% or higher over the next two years, driven by NAND upgrade cycles and stable replacement demand.
The firm describes TOTO as the "most undervalued and overlooked AI memory beneficiary." However, Palliser also notes TOTO has failed to adequately communicate the importance of this business to shareholders and the market, with a disproportionately low percentage of planned investments directed toward this high-profit segment.
Founded by former senior figures from Elliott Management, Palliser has played an increasingly significant role in Japan's recent wave of shareholder activism. The fund's other holdings include Tokyo Tatemono, Keisei Electric Railway, and Japan Post Holdings.
Reform Proposals and Capital Optimization
Palliser recommends TOTO scale up its advanced ceramics business, sell cross-shareholdings, and utilize its 76 billion yen ($496 million) net cash more efficiently. The fund calculates that implementing these measures could push TOTO's share price up by more than 55%.
Cross-shareholdings represent a long-standing corporate governance issue in Japan. Under the Tokyo Stock Exchange's push for governance reform, an increasing number of companies have begun reducing such holdings to improve capital efficiency.
TOTO is not the first non-technology company in Japan to benefit from the AI boom. Ajinomoto, known for its soup stock products, has also ridden the semiconductor industry expansion wave by producing insulating materials for chips and motherboards using resins derived from its expertise in umami seasoning.
Analysts had previously noted the potential of TOTO's advanced ceramics business. When Goldman Sachs upgraded the stock to "buy" last month, it emphasized that global AI data center investment would support sustained high growth for this segment.
These cases demonstrate how many traditional companies within Japan's manufacturing system, leveraging decades of accumulated materials and process technology, are participating in the global semiconductor supply chain in unexpected ways, becoming invisible supporters of AI infrastructure development.