The most secretive AI winner

Author of this article | Freddy

Data support | Pythagorean Big Data

This year, in the global AI chain sector, not only have the core major manufacturers absolutely profited, but also small manufacturers in the second, third, and fourth-tier industrial chains have reaped significant benefits. Even some companies that seem to have no connection to this business have been wildly speculated.

In the Japanese and Korean stock markets, a group of established manufacturing companies have seen their stock prices rise, leaving many AI concept stocks behind.

TOTO, known for its bathroom equipment, has seen its stock price reach a five-year high, rising 145% over the past year.

What drives this round of revaluation is not its core business of toilets, which has been operating for over a hundred years.

Instead, it is the precision ceramics in the semiconductor sector, which it has been deeply involved in for nearly forty years.

01 Positioning in the AI Track

TOTO's ceramics business began in 1984. At that time, the company established a new materials development department, attempting to shift the high-temperature sintering process accumulated over decades from toilet manufacturing towards industrial precision ceramics. In 1990, it began collaborating with the leading U.S. semiconductor equipment company Lam Research to develop etching chamber components, stepping into the semiconductor supply chain.

However, for the next thirty years, this business had an extremely weak presence. High process difficulty, low yield rates, and low capacity utilization—semiconductor ceramics have long dragged down the group's profits. Until five years ago, the profit margin was only 9%.

The real turning point came in 2020. A new factory in Oita Prefecture introduced fully automated production lines and AI quality inspection systems, significantly improving yield rates. Soon after, at the end of 2022, AI demand began to explode, and NAND manufacturers crazily expanded production, with orders for electrostatic chucks flooding in.

With the combination of these two variables, the ceramics business underwent a complete transformation.

In the fiscal year 2025, semiconductor ceramics generated 67.4 billion yen in sales, a year-on-year increase of 34%. Operating profit reached 28.9 billion yen, up 42%. The profit margin was 43%. The bathroom business, which has been around for nearly a hundred years, only has a profit margin of 5%. Although the ceramics business accounted for only 9% of total revenue, it contributed 54% of operating profit.

TOTO's identity in the capital market has been very stable—building materials stock, bathroom stock. The P/E ratio has long hovered between 18 and 20 times. During the peak of the semiconductor cycle in 2021, it briefly touched 39.5 times, but by the end of 2024, it fell back to 18.8 times.

The market was not prepared to price a toilet company as a semiconductor equipment component company. However, four catalysts in 2026 broke this barrier:

• January 22: Goldman Sachs upgraded TOTO from "Neutral" to "Buy," raising the target price from 4,800 yen to 6,100 yen. The stock price rose 11% that day.

• February 17: Activist investor Palliser Capital issued an open letter stating that TOTO is "the most undervalued AI beneficiary in the market," estimating its intrinsic value to exceed 8,800 yen.

• April 30: The annual report revealed—EPS of 71.16 yen, exceeding market expectations by 79%, leading to an 18% increase that day, marking the largest single-day increase in five years.

• June 3: Management announced an investment of 80 billion yen over the next five years to expand semiconductor ceramic capacity, with the proportion of semiconductor capital expenditure jumping from 11% to over half. The stock rose another 11%.

After these four catalysts, the company's stock price soared. However, there was already a significant divergence from market perception.

Is TOTO a "bathroom company with a semiconductor business," or a "semiconductor equipment component company with a bathroom business"? This corresponds to entirely different valuation multiples.

The difficulty in making this judgment arises from TOTO's unique position in the semiconductor supply chain.

The more advanced the chip, the more stringent the manufacturing environment. EUV lithography must be completed in a vacuum, and temperature fluctuations in each process cannot exceed the micron level. Traditional mechanical fixtures simply cannot withstand this—only ceramic electrostatic chucks can meet four conditions simultaneously: withstand temperatures over a thousand degrees, resist strong corrosive plasma, provide ultra-high insulation, and not release gas in a vacuum environment.

As 3D NAND stacks from 200 layers to 500 layers, each additional layer requires an additional low-temperature etching process, and each etching process requires an electrostatic chuck. As chips transition from large chips to small chips assembled together, thermal density skyrockets, making ceramics the only solution.

Pushing this logic to its conclusion leads to a counterintuitive conclusion: the more the chip industry pursues "advanced," the deeper its reliance on traditional material processes becomes.

So the question arises: how can TOTO catch this wave of demand?

Competitors can manufacture alumina ceramic parts, but maintaining high purity, uniform grain size, and precise dimensions during large-scale sintering—this entire know-how is only mastered by TOTO. From 1995 to 2026, it has been the company with the most electrostatic chuck patent applications globally. Since starting its collaboration with Lam Research in 1990 to develop chamber components, the two have been bound for over 35 years, with Lam awarding it the Supplier Excellence Award for two consecutive years.

In terms of capacity, TOTO's Kyushu factory is already at full production, and a new firing workshop in Fukuoka is expected to be operational by 2027. The 80 billion yen investment plan announced in June of this year far exceeds market expectations.

However, what truly leaves competitors in the dust is not capacity, but time. Certifying a new supplier for electrostatic chucks takes at least five years. Even if competitors now invest heavily in building factories, it will take five years from the start of certification to qualified shipments.

The market's speculation on TOTO is still ongoing, and the path of shifting the valuation anchor from building materials to semiconductor equipment components has not yet been completed.

02 Not Just TOTO

TOTO is not an isolated case. The same logic is playing out in different industries.

Nittobo, a Japanese textile company that has been making fiberglass for 128 years, saw its stock price rise 325% last year.

What drove this surge is a type of low thermal expansion glass fiber cloth called T-glass. As AI chip packaging substrates grow larger and more layers are stacked, the requirements for the thermal expansion coefficient of substrate materials have tightened dramatically—ordinary electronic cloth can no longer meet the demands of advanced packaging, making T-glass the only choice.

About 90% of the global supply of T-glass is concentrated in Nittobo, with capacity already booked until 2027. The supply gap for high-end products exceeds 40%, directly triggering two rounds of price increases—20% across the board in August 2025, and another increase of 20% to 30% in April 2026. The price pressure has been transmitted along the supply chain, with Apple bypassing multiple channels to secure capacity directly from Nittobo.

A similar identity mismatch is occurring with another more famous Japanese company.

Ajinomoto, the world's largest producer of MSG, accumulated expertise in amino acid chemistry and developed an insulating film called ABF for chip packaging substrates' interlayer insulation in the late 1990s.

Source: Ajinomoto official website

For over twenty years, ABF has been the industry default standard, holding about 80% to 95% of the global market share. As AI chips' advanced packaging substrates stack from 8 layers to 16 layers, each additional layer requires another ABF film. This business accounts for only 6% of Ajinomoto Group's revenue but contributes 30% of profits, with a profit margin exceeding 50%.

The explosive cases of Nittobo and Ajinomoto point to the same conclusion: the high-profit concentration positions in the AI supply chain are not necessarily at the technological forefront; they can also be in seemingly inconspicuous segments that are critical to the path and where capacity cannot respond quickly.

The same logic is taking root in the A-share market, but the narrative is different; the story in the A-share market is about domestic substitution combined with the opening of a time window for supply-demand gaps.

• Precision Ceramics Direction

  The domesticization rate of high-end electrostatic chucks in China is less than 1%, and 12-inch products are almost entirely reliant on imports. Zhongci Electronics is currently the fastest progressing local company—its electrostatic chucks have passed verification from leading domestic equipment manufacturers and have entered the mass supply stage; aluminum nitride thin film substrates have also begun delivery to customers.

  In the first quarter of 2026, the company's revenue grew by 79% year-on-year, and net profit attributable to the parent company increased by 57%. The stock price rose from 45 yuan to 176 yuan over 52 weeks, nearly tripling. Following closely are Kema Technology and Pioneer Precision, but they still need time to achieve scale shipments.

• Electronic Cloth Direction

  High-end electronic cloth prices have cumulatively risen by 250% to 300% since early 2024, with some extreme models seeing even higher increases. Honghe Technology is the global leader in ultra-thin cloth (16 microns and below), holding about 26% market share and has been certified by NVIDIA and TSMC. In the first quarter of 2026, its single-quarter net profit reached 140 million yuan, a year-on-year increase of 354%.

  Feilihua is the only domestic company capable of mass-producing quartz cloth and has also received certification from NVIDIA—quartz cloth prices range from 200 to 400 yuan per meter, with a gross profit margin exceeding 60%. According to Huatai Securities, the market size for special low-dielectric electronic cloth (Low-Dk and quartz cloth) is expected to soar from 3.9 billion yuan in 2025 to 29.2 billion yuan in 2027, with an annual compound growth rate of 173.3%. This material has become one of the fastest-growing segments in the AI hardware field.

The core tension reflected in the A-share market is that the supply-demand gap provides a time window, while the speed of substitution determines elasticity. The real test lies in whether capacity can be released on schedule and whether yield rates can reach levels comparable to Japanese competitors.

03 Epilogue

The inertia of industry classification is very strong; a company that has been making toilets for over a hundred years will not automatically be classified as a technology stock just because its semiconductor business contributes more than half of its profits. The same logic applies to textile factories, MSG factories, and daily chemical companies—their traditional labels will not automatically fall away.

However, changes in profit structure will not wait for market perception to catch up. The difference lies in whether the market gradually adjusts amid hesitation or jumps to position once the logic is sufficiently clear.

The structural trend of cross-industry migration will not reverse. The precision requirements of AI for chips will only become more stringent, and the reliance on traditional material processes will only deepen. But the rhythm must be clear—realizing the logic takes time, while stock prices often run ahead of the logic. (End of article)