When "smart toilets" become targets of "AI storage"

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In Tokyo’s traditional stock market sectors, TOTO has long been regarded as a defensive asset in the bathroom industry. But in the eyes of the London-based activist hedge fund Palliser Capital, this century-old “king of toilets” is a severely misunderstood and undervalued AI storage chip concept stock.

Last week, Palliser Capital sent a letter to TOTO’s board of directors, urging it to further develop its advanced ceramics business, stating that this business occupies a critical position in the semiconductor supply chain.

The fund pointed out that, thanks to its technological barriers in precision ceramics, TOTO has secured a key link behind AI computing power—NAND storage chip manufacturing—and this business already contributes 40% of the company’s operating profit. If management can expand the advanced ceramics business and improve capital allocation, the company’s share price could potentially rise by more than 55%.

From firing toilets to producing wafers

The company’s most unknown trump card is the “electrostatic chuck.” In the semiconductor manufacturing process, this is a key component that uses electrostatic force to adsorb and fix silicon wafers. As AI trends drive NAND storage chips towards higher layers and more complex structures, demand for “cryogenic etching” in manufacturing has surged.

This is TOTO’s moat. Leveraging precision ceramics technology accumulated since the 1980s in bathroom manufacturing, TOTO’s electrostatic chucks can maintain very high stability at extremely low temperatures. Palliser noted that TOTO holds a five-year lead over competitors, who are unlikely to catch up in the short term.

Although TOTO has long been involved in this field, it was only in recent years, with the explosion of AI demand, that this business moved from the fringes to center stage. Palliser emphasized that TOTO has quietly evolved from a traditional bathroom champion to a “hidden champion” in the field of semiconductor precision ceramics.

Demands of activist investors

Palliser Capital’s founder comes from Elliott Management, the world’s most renowned activist hedge fund, and is well-versed in using shareholder activism to pressure management for reform.

Palliser believes that TOTO’s current valuation in no way reflects its true value as a “beneficiary of AI storage.” Based on the NAND chip upgrade cycle and steady replacement demand, the business is expected to achieve more than 30% revenue growth in the next two years.

However, the root of the buried value lies in management’s conservatism and lack of effective communication. Palliser outlined three main issues in its letter:

1. Lack of narrative: The company has failed to effectively communicate the core position of its precision ceramics business to the capital markets;
2. Resource misallocation: Although this business is highly profitable, the planned capital expenditure (Capex) does not match its strategic importance;
3. Poor capital efficiency: The company sits on ¥76 billion (approx. $496 million) in net cash, with a large amount of inefficient cross-shareholdings.

Palliser’s message is clear: expand investment in the precision ceramics business, divest non-core cross-shareholdings, and use cash more efficiently to reward shareholders.

It’s worth noting that last month, Goldman Sachs raised TOTO’s rating to “Buy,” citing the same optimism about global AI data center investment boosting TOTO’s precision ceramics business. In the past year, TOTO’s stock price has risen more than 60%.

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