Shares in Japanese toilet maker Toto soar on AI-related pivot

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Japanese toilet maker Toto’s shares surged 18 per cent to a five-year high on Friday after unveiling plans to boost production of semiconductor components and posting record annual profits.

Its advanced ceramics business has turned Japan’s largest toilet manufacturer into an AI play and caught the attention of activist investor Palliser Capital.

The stock closed at ¥6,425 ($40.86), the highest level since 2021 and bringing the gain this year to more than 46 per cent.

Despite being better known for its bidet washlets that have defined the Japanese toilet globally, Toto is also the world’s second-largest producer of electrostatic chucks used in the manufacturing of Nand memory chips.

Surging sales of semiconductor components — gaining 34 per cent year on year — have lifted the division to account for more than half of Toto’s operating profit, which jumped 11 per cent to ¥53.8bn in the year to March.

The toilet producer expects sales for the unit to grow 27 per cent in the coming year, as it pledged to invest ¥30bn to strengthen mass production, as well as boost research and development, by the end of the 2028 financial year.

Other Japanese companies that produce components essential to the rollout of AI have been benefiting from investor interest and pledging to pour funds into boosting output.

The AI boom has led Kioxia, a producer of flash Nand memory, to eclipse Sony in market value.

Meanwhile, cosmetics manufacturer Kao started production last year at a cleaning factory for chips and Ajinomoto, the inventor of monosodium glutamate, is investing more than ¥25bn to boost production of its insulating film critical for motherboards by 2030.

Palliser had called on Toto to promote the division’s importance to the market and plough more of its investment into the highly lucrative segment when it took a stake in February.

The big rally for Toto comes despite the threat to its regular business of toilets and bathroom fittings from potential adhesive and plastic shortages due to the Middle East energy shock.

Toto suspended new orders of prefabricated baths in mid-April. Although it has since gradually resumed taking orders, building contractors in Japan say that they still cannot get hold of bathroom units to complete projects.

The toilet producer said that it expects the risks related to geopolitical turmoil to ease from July, as it factored in a ¥7bn hit.

Many analysts, however, were underwhelmed by Toto’s results. “Profit guidance gets a passing grade,” said Citi analyst Masashi Miki. “Although Middle East assumptions carry some downside risks.”