Strong mining output from natural gas saw industrial production (IP) in May rising at the same pace as in April by 4.0% y/y. In addition, the strong mining output offset the moderate gain from manufacturing and electricity, which rose 4.2% y/y and 5.7% y/y respectively in May. Though the manufacturing sector will continue to experience challenges, namely firms that focus on exports where demand is weakening, the downwards pressure could possibly ease. Much depends on the possibility of headwinds from the external front softening and if there is support from domestic manufacturing activities.

Inventories have reduced as part of stock adjustment measures. As a result of lower buying volumes, it has helped ease pressure on supply chains. Manufacturing players are focusing on cost control amid slower production growth while unfavourable exchange rate variations are leading to higher raw material prices, thus pushing up the overall operating costs.

Taking into consideration of the average PMI reading for the 2Q2019 which is by far the highest since 3Q2018, and supported by an improvement in companies’ future output expectations at the highest for five-and-a-half years, add to signs that the business environment has started to brighten again. On that note, we believe the manufacturing output should read above 4% in 2Q2019 and the GDP should grow faster to around 5%.

• Strong mining output from natural gas saw industrial production (IP) in May rising at the same pace as in April by 4.0% y/y, beating market expectations of 3.4% y/y. Mining output grew 3.0% y/y from 2.3% y/y in April following a 7.6% y/y gain in natural gas output (+6.1% y/y in April) which negated the 2.0% y/y drop in crude oil output in May (-1.9% y/y in April).

• In addition, the strong mining output offset the moderate gain from manufacturing and electricity, which rose 4.2% y/y and 5.7% y/y respectively in May compared with 4.3% y/y and 5.8% y/y in April. Focusing on manufacturing, the drag came from the slower electrical & electronic sub-sector which grew moderately by 3.7% y/y (+4.1% y/y in April) as a result of weaker global demand for semiconductors due to the maturing tech cycle.

• Though the manufacturing sector will continue to experience challenges, namely firms focus on exports where demand is weakening, the downwards pressure could possibly ease. Much depends on the possibility of headwinds from the external front softening and if there is support from domestic manufacturing activities. Inventories have reduced as part of stock adjustment measures. As a result of lower buying volumes, it has helped ease pressure on supply chains.

• Meanwhile, we noticed that manufacturing players are focusing on cost control amid slower production growth. In part, this is due to the unfavourable exchange rate variations that are leading to a spike in raw material prices, thus pushing up the overall operating costs.

• Taking into consideration of the average PMI reading for the 2Q2019 which is by far the highest since 3Q2018, and supported by an improvement in companies’ future output expectations at the highest for five-and-a-half years, add to signs that the business environment has started to brighten again. On that note, we believe the manufacturing output should read above 4% in 2Q2019 and the GDP should grow faster to around 5%.

Source: AmInvest Research - 15 Jul 2019