Japanese manufacturing giants "shift to AI in bulk," "bathroom giant" expands production of storage components, Toto's stock price soars

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Japanese bathroom giant Toto is transforming from a toilet manufacturer into a key player in the AI industry chain thanks to its semiconductor component business.

On Friday, the company announced an expansion of its semiconductor component production capacity and released record annual profit data. Its stock price surged 18% in a single day, reaching a five-year high at 6,425 yen (around $40.86). Year-to-date, the company's stock has risen nearly 50%.

The core driver of the surge comes from its advanced ceramics business. Toto is the world’s second largest producer of electrostatic chucks, components widely used in NAND memory chip manufacturing. With the growing demand for AI infrastructure, this business now accounts for half of the company’s operating profit and attracted activist investor Palliser Capital to take a stake in February this year.

Toto's transformation is not unique. Several traditional Japanese manufacturers are accelerating their shift to AI-concept stocks by leveraging their hidden roles in the semiconductor supply chain.

Toto is not an isolated case; traditional Japanese manufacturers are shifting toward AI in bulk

For the fiscal year ended March 2024, Toto’s operating profit grew 11% year-on-year to 53.8 billion yen, reaching a historic high. Among this, sales from the semiconductor component division rose 34% year-on-year, with its share of operating profit breaking 50% for the first time. The company predicts that this division’s sales will grow another 27% in the coming year and has pledged to invest 30 billion yen in capacity expansion and R&D by the fiscal year 2028.

In contrast to the high growth in the semiconductor business, the core bathroom business is encountering pressure. Due to shortages of adhesives and plastic raw materials, Toto suspended new orders for prefabricated bathrooms in mid-April, and some project progress was hindered. The company expects risks related to geopolitics to gradually ease starting in July and has included about 7 billion yen in losses in its performance forecasts.

After activist investor Palliser Capital took a stake in Toto in February this year, it publicly urged the company to fully display the strategic value of its semiconductor business to the market and demanded that more capital be allocated to this high-margin segment. Judging from Toto’s disclosed investment plans and earnings, these demands have been addressed to some extent.

However, analysts responded cautiously. Citi analyst Masashi Miki said, “The profit guidance is barely qualified,” while noting that related assumptions in the Middle East region “pose certain downside risks.”

Toto’s surge reflects a broader phenomenon: Traditional Japanese manufacturers are entering the AI industry chain en masse. Cosmetics giant Kao started up a chip-cleaning factory last year; Ajinomoto, the inventor of MSG, announced plans to invest over 25 billion yen by 2030 to expand production capacity for key films used for motherboard insulation. These companies, with their core roles in the semiconductor and AI hardware supply chain, are being revalued by the capital markets.

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