• IPI improved to 4.7% in May

• IPI expansion was boosted by upbeat performance across all sectors

• Manufacturing component was inspiring

• Mining component recorded a positive growth

OVERVIEW

Malaysia’s industrial production index (IPI) rebounded to 4.7% in May, reversing a 3.3% decline in April. The positive growth was largely propelled by upbeat performance of all sub-sectors namely manufacturing (5.1%), mining (2.9%) and electricity (5.0%). The expansion of IPI was due to better consumer spending as well as recovery in domestic demand. On a MoM and seasonally-adjusted basis, IPI has shown a better performance of 7.4%, an appreciation against April (- 5.6%). We maintain our projection that Malaysia's economy will continue to grow at a rate of 4.5% throughout the entire year of 2023, primarily driven by various domestic factors such as a strengthening labor market, increased investment realization, and advancements in the construction and agriculture sectors.

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component growth rose solidly to 5.1% in May compared to -3.0% in April as output was pushed by the better performance in a few components namely (i) F&B (jumped by 11.6%), (ii) transport equipment and others (increased by 12.9%), (iii) non-metallic products and others (up by 8.1%) as well as (iv) textile, wearing app. and others (grew by 6.1%). The steady expansion of the F&B sector indicates a positive shift in the supply and demand dynamics within our local economy, particularly following the COVID-19 pandemic. The impressive performance of the manufacturing sector stands in contrast to the Manufacturing PMI, which experienced a slight decline from 47.8 in May to 47.7 in June. This indicates a continued easing of operating conditions for the tenth consecutive month, although the rate of moderation was the most significant since January.

On specifics, manufacturing IP that grew at a faster pace of +5.1% YoY in May was also partially supported by F&B inspiring performance following its doubledigit jump to 11.6%. Looking at consumer-related products we note that this component still has a good growth momentum thanks to resilient consumer demand backed by better consumer sentiment and household spending (F&B sub-component: +11.6% in May 23 versus -4.8% in April 23 and +7.6 in March 23). Going ahead, we foresee that the F&B sector's positive outlook will be propelled by pent-up demand backed by a healthy job market and anticipated higher tourist spending. Furthermore, we expect that domestic production of consumer-oriented goods will receive a boost from increased domestic spending by local consumers and a rise in tourist arrivals. We believe that the local economy stands to benefit from the resumption of outbound travel from China.

The recovery in transport segment has been encouraging, jumped by 12.9% in May versus -9.0% in the previous month. We believe that one of the factors that propelled the output is fleet expansion and higher warehousing. We anticipate the inspiring performance may stay supported by gradual reopening of international borders. Moreover, we opine that the 2023 Budget's allocation of RM16.5bn to the transport sector may accelerate the growth of our local transport industry.

On a MoM and seasonally-adjusted (SA) basis, manufacturing output up by 7.7% in May, an appreciation against April at -6.0%.

Mining: Mining output recovered in May (vs -4.9% in April), its first month of expansion, after a significant declined in the previous month. Mining output in May was driven by solid natural gas output (May: +4.5%) and steady turnaround by petroleum oils and condensate (May: +0.6%).

On a MoM and SA basis, mining output that increased by 5.9%, a solid improvement as compared to -4.4% in April.

We anticipate a better outlook for mining sector in 2H23 mainly driven by substantial inventories draw due to OPEC+ production cut. Recall that it already had in place a production cut of 3.66mn bpd for 2023. Note that recently Saudi announced that it will make a voluntary cut by 1mn bpd in July to 9mn bpd in order to reach the said target. It is worth noting that the rising US oil inventories in 1Q23 has recently slowed down to the 5-year average level.

Electricity: Electricity component delivered a positive growth of 2.5% in May, an expansion compared to a contraction of -2.3% in April. The expansion in electricity generation during the month was supported by stronger energy demand in tandem with increased business, upbeat manufacturing activities as well as hot weather that is expected to prolong until August. In tandem with the better performance from electricity in May, electricity output rose on a MoM and SA-adjusted basis or to 9.4% in May compared to -3.0% in April. Nonetheless, we are cautious and less sanguine on electricity component in 2H23 as we foresee weak global demand for electronics end market amid inflationary pressure as well as slower-than-expected recovery from the Chinese market. Note that Chinese market represents approximately 30% of global semiconductor sales.

OUTLOOK

We maintain our view that Malaysia’s production remains favorable given the solid output numbers in May. The recovery in the production especially in manufacturing has been encouraging and this suggests to us that the higher production activity will stay supported by the reopening of international borders. Hence, going ahead we expect the manufacturing output will continue to grow this year in anticipation of growing demand. We believe that demand will continue to be supported by domestic-driven sectors. However, we are concern on electricity output in the coming months which could be drag by slower than expected recovery in Chinese market as one of the biggest market in semiconductor sales. We reiterate our IPI forecast for 2023 which is projected to expand by 4.5%, a moderation against 6.9% in 2022.

Source: BIMB Securities Research - 13 Jul 2023