Welcome to the podcast.
I'm your host, Jaden Schafer.
Today on the show I want to talk about, I think, a really interesting story that basically nobody is covering, and that is how there's a toilet company Toto, out of Japan, and it is quietly becoming one of the most undervalued and overlooked AI memory companies or beneficiaries out there.
This is really interesting.
We see AI basically coming into every industry and manufacturing for AI and AI parts.
We need a lot of help on that front.
And some of it is coming from the most unlikely of sources like this Japanese toilet company.
So I want to.
I want to break down the story and show you what's going on with Toto, why their stock has rallied 40 on some of this news.
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All right.
I want to talk about what's going on in Japan right now.
This is, you know, Toto is famously a company.
They have like these toilets with like heated seats and this like the sprayer that sprays you and washes you and dries you.
And like, you know, there's like all this crazy.
Everyone's heard the legendary fables of Japanese toilets.
And Toto also is a brand that is in America.
You've seen it in lots of airports as well, as far as just a toilet company.
Now, in order to make these toilets, they obviously have to do a lot of work in manufacturing in ceramic.
And there's a new report that just came out of the Financial Times that says a UK activist investor.
Pallister Capital has taken a stake in this company.
They sent a letter to the board and they argued that Toto's advanced ceramic division is dramatically undervalued.
They said that the company which, of course, is just known for toilets sitting in the middle, is basically right now sitting in the middle of AI infrastructure and semiconductors supply chain story and that it should be playing a bigger role.
Pallister goes so far as to call Toto quote the most undervalued and overlooked AI memory beneficiary.
I think that is definitely activist framing.
This is not kind of a neutral analysis, but it's rooted in something really real, right?
There is a surge in AI spending right now and it has tightened memory markets and it's really intensified demand for semiconductor manufacturing tools.
And Toto is, I guess, apparently in this whole ecosystem.
So for decades, Toto has been producing highly specialized ceramic components which are used in chip fabrication.
These aren't, you know, in bathrooms, of course, but they're precision engineered parts and they hold silicone wafers in place during delicate processes like etching and deposition.
And so they have to be able to go up to really extreme heats frequently.
They have to do a lot of thermal stress and they have to also prevent contamination.
They're also supposed to maintain like exact tolerances, and total's lineup includes um, you know, like air bearings, they do bonding capillaries and a lot of other things.
I think there's some structural components for high precision semiconductor equipment that they work on, and right now investors are starting to actually realize this.
Of course, we have this activist investor that's going off on it, but I think this isn't just like a side project for Toto.
There's some recent reporting that suggests that advanced ceramic business for Toto accounts for about 40 of their operating profit.
And I think even as the brand right.
If this is known globally with toilets, that's what everyone would associate Toto with.
But their AI data centers are starting to like.
The AI data centers that they're supplying are starting to have a massive, outsized demand for memory.
There's a tightening supply chain, which is pushing up wafer fab utilization.
And I think, because of that dynamic, this is feeding directly into demand for the equipment and components that are required to manufacture those chips.
So Toto's been already like working on this.
They've already been kind of making those chips.
It was sort of a side thing.
And all of a sudden, this is becoming a major part of their business.
I mean 40 of their operating profit And nobody's talking about it until, of course, this activist investor takes a big stake, starts very vocally discussing this.
And now, of course, their stock price has been going up.
So Pallister is basically urging management of the company Like, look guys, you have to communicate the value of this segment better.
You need to sharpen capital allocation.
And you have to deploy your approximately... They have about $76 billion in net cash.
And that's in Japanese won, of course.
But he's saying look, you guys have to deploy this more aggressively, potentially expand the ceramics capability ahead of rivals.
And I think there's a bunch of different analysts at firms.
Goldman Sachs is one of them.
And they've highlighted that earnings leverage tied to those specific components in part, you know, on expectations of a NAND recovery.
You know this is super critical.
And the market obviously has responded.
Total shares are up about 40 percent year to date.
I think this is a lot of.
This is rising because of the analyst upgrades and, of course, the activist pressure.
Investors, I think, are not just trying to chase.
You know, kind of like a novelty AI narrative which is attached to a toilet brand.
I think this is probably what a lot of people would accuse them of or would say like look, you guys are just trying to like.
You found one little in an AI industry and because it's booming, you're a toilet company, you're trying to just kind of bump your stock up.
It reminds me of, you know, during a lot of the crypto days, there was like a lemonade company that just changed its name to blockchain lemon or something like that.
So that it could uh, you know, then there's I don't, I have no idea why they just literally just put the name blockchain and their company name.
And all of a sudden their stock bumped up.
It was about to get delisted for lack of like trading shares and stuff.
And That saved them for a couple months.
And then I think eventually they got pulled off of the stock market for lack of volume or something like that.
But anyways, it doesn't feel like a desperate ploy like that.
I mean, this is 40% of their operating revenue.
And this is a, you know, they have a massive opportunity here.
So I think there's legitimately an opportunity.
Toto may turn into an AI... ceramics supplier for these wafers and all of that.
I think there's some people that are trying to be cautious with this, specifically because when Pallister the kind of activist in all of this he's putting a pitch in for the company and he was saying like look, you guys have a, this is like.
His quote was that there was a durable five-year technological moat.
Some are saying this isn't quite accurate.
Now what I will say is that electrostatic chucks and also a lot of the other kind of related ceramic parts, those are super essential for advanced etch processes.
And so I think whether that translates into kind of this growth, this like sustained growth and this kind of breakout, is going to depend a lot on the fab expansion plans.
Major memory manufacturers have been really careful about committing to large capacity increases.
They're kind of worried about oversupply if there was a bubble or if things shifted, if AI demand cools.
One thing I will say though, is that Toto, moving from kind of being this famous toilet brand to perhaps, a semiconductor material supplier, is just showing how much in kind of the overall industry, how much of a shift we're seeing, and how AI is definitely changing supply chains.
I think the people that are winning is not just NVIDIA or AMD.
They include a lot of, you know, material sciences firms, a lot of niche component makers.
There's a lot of kind of this embedded knowledge, deep tech that's inside of chip production, that is seeing just huge booms and is being incredibly successful and prospering a lot.
I mean even to the point where I have a neighbor where I live in North Carolina who works for an organization who's absolutely exploding right now.
They've just famously done gas tanks for industrial you know, buildings.
So if you have like a backup generator, you have an industrial gas tank that can power that for power outages and things like that.
And their business is exploding right now because all of these new data centers need industrial gas tanks for, if you know, power ever goes out and they need, like a backup, power supply.
So There's all of these kind of like run-on industries and businesses that are benefiting from the AI boom that I think we don't talk about enough.
Right now, I think all over Japan, there's a lot of other legacy manufacturers.
I think there's Ajinomoto who is doing chip substrate materials.
There's like cosmetic companies that are supplying wafer cleaning agents.
I think there's companies that are being assessed through all of these different you know, like basically all these companies that did something different.
And now that's like, well, we need a lot of new supplies for what's happening in AI.
And they're looking outside of maybe the typical AI data center chip providers.
And they're going to.
You know they're going to some of these, like cosmetic companies and other places, toilet companies, places you wouldn't expect.
I think there's a lot of opportunity right now.
But I think this is also probably a little bit of a cyclical risk that comes with really wrapping all of your business into the next wave of tech capital spending, because this is obviously going to go crazy and a lot of money is going to go in this way.
But Toto, potentially you know, if there was an AI bubble today and all of the all you know, everything got wiped out.
I mean, 40 percent of the operating profits of Toto are coming from, coming from this, right now, making these, making these ceramic bits.
So I think at the end of the day, these companies don't want to tie themselves too heavily.
But also there's massive spending, massive demand and I think they can all make a lot of money by making sure they get into the industry.
So it's a really fascinating time to watch as toilet companies are becoming a really important part in the semiconductor supply chain.
Thank you so much for tuning into the podcast today.
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