- Recent media reports highlighted that Mazda Motor and Toyota Motor are in the final stages of discussions aimed at forming a comprehensive partnership. Under the partnership:- (1) Toyota will share its plug-in hybrid and fuel cell technologies; (2) Mazda will share its SkyActive technology for gasoline and diesel engines; and (3) both will enhance ties in parts procurement and sales finance.

- The major Japanese automakers derive a substantial portion of sales from the developed markets e.g. North America and Europe, and this is seen as a move to meet developing regulations on stricter emission standards for vehicles in these markets.

- In the larger scheme of things however, the benefits for Mazda from the technology tie-up will likely be meaningful only in the mid term. Toyota/Daihatsu might be the more immediate beneficiary as the majority of global car sales in the near term will still remain dominated by conventional gasoline/diesel engines which is what Mazda’s Skyactiv technology is centred on.

- The immediate term benefit for Mazda will likely come in the area of joint parts procurement as it can ride on Toyota’s economies of scale. It remains to be seen if the potential savings are passed on (in the form of revised CBU or CKD kit pricing) to Mazda’s overseas distribution units (including BAuto/BAuto Philippines).

- On the domestic front, Perodua had indicated before that there are currently no concrete plans to introduce hybrid-based compact models as it is likely not feasible for Perodua (which competes in a price sensitive segment) to utilise expensive hybrid technology (which also significantly lacks scale given the small number of hybrid car sales at this juncture). The induction of Mazda’s Skyactiv engine technology in future models can benefit Toyota/Daihatsu and could lower cost of engine development for Toyota/Daihatsu (and indirectly Perodua).

- MBM (BUY, FV: RM3.80/share) is our top sector pick for:- (1) the strong recovery of Perodua TIV and margins riding on relatively weak JPY-MYR levels; (2) the cheap proxy into Perodua’s earnings at the implied valuation of only 9x FY15F earnings; and (3) normalising capex coupled with earnings turnaround which will drive a rise in dividend payout.

- BAuto remains a BUY (FV: RM4.20/share) while UMW is a HOLD (FV: RM11.40/share), though we note that the incorporation of Mazda’s Skyactiv technology into future Toyota models could accelerate Toyota model qualification for Malaysia’s EEV program - where it is at a big disadvantage currently versus key competitors Honda and Mazda. The partnership therefore could be significant enough to be a game changer for UMW Toyota from a domestic market point of view.

Source: AmeSecurities Research - 13 May 2015