IPI growth maintained at +4.0% YoY in May (Apr: +4.0% YoY), beating market expectations of a moderation to +3.5% YoY. Growth was driven by stronger mining production (+3.0% YoY; Apr: +2.3% YoY) amid slight moderation in manufacturing (+4.2% YoY; Apr: +4.3% YoY) and electricity production (+5.7% YoY; Apr: +5.8% YoY). While manufacturing production has been broadly stable, we anticipate manufacturing production to moderate in the immediate term amid slowing global demand and prolonged trade tensions.

DATA HIGHLIGHTS

IPI growth was stable at +4.0% YoY in May (Apr: +4.0% YoY), exceeding the +3.5% YoY consensus estimate. The growth was mainly attributed to stronger mining production (+3.0% YoY; Apr: +2.3% YoY) which offset the slight moderation in manufacturing (+4.2% YoY; Apr: +4.3% YoY) and electricity production (+5.7% YoY; Apr: +5.8% YoY) (refer to Figure #1).

Manufacturing sector growth was supported by domestic-oriented sector, albeit at a marginally slower pace (+4.8% YoY; Apr: +4.9% YoY). The rise in ‘food, beverages & tobacco’ production (+4.7% YoY; Apr: +4.2% YoY) was offset by slower growth in non-metallic mineral & metal products (+3.8% YoY; Apr: +4.0% YoY) and transport equipment production (+6.9% YoY; Apr: +7.2% YoY). Vehicle production also moderated (+9.3% YoY; Apr: +9.5% YoY) due to the shorter working month.

The export-oriented sector also moderated slightly to +3.9% YoY (Apr: +4.0% YoY) due to slower growth in ‘petroleum, chemical, rubber and plastic products’ (+3.2% YoY; Apr: +3.6% YoY) and ‘electrical and electronics’ production (+3.7% YoY; Apr: +4.1% YoY) which offset higher textiles and footwear (+5.8% YoY; Apr: +5.7% YoY) and wood and paper products (+6.5% YoY; Apr: +5.2% YoY). The higher growth in these two sectors could be attributed to the trade diversion impact following the on going US-China trade dispute.

The mining sector grew at a faster pace of +3.0% YoY (Apr: +2.3% YoY), driven by natural gas production (+7.6% YoY; Apr: +6.1% YoY), which recorded the highest growth since Sep 2017. The boost in LNG production may be attributed to higher production in Sarawak and Petronas restarting its LNG production from its PETRONAS Floating LNG Satu (PFLNG1) off the eastern state of Sabah. This offset the faster decline in crude petroleum production (-2.0% YoY; Apr: -1.9% YoY). Crude petroleum production is anticipated to be subdued due to OPEC’s extended production cuts by nine months to March 2020.

HLIB’s VIEW

Malaysia’s IPI growth bucked the regional trend due largely to the improvement in the mining sector following normalisation in supply conditions. On the manufacturing sector, manufacturing sales recorded a slight moderation (+6.7% YoY; Apr: +6.8% YoY). On the employment front, manufacturing wages continued to grow (+4.1% YoY; Apr: +4.4% YoY) while employees engaged remained on expansionary path (+1.4% YoY; Apr: +1.7% YoY), albeit at a slower pace. While manufacturing sector remained broadly steady in May, we expect the sector to moderate in the immediate term. Global semiconductor sales continued to decline (May: -14.6% YoY) while leading indicators such as global manufacturing PMI remained in contractionary phase (49.4; May: 49.8), due to the decline in output (49.5; May: 50.1) and new orders (49.0; May: 49.5). The prolonged uncertainty on US China trade dispute amid lacklustre global demand is expected to dampen overall business sentiment as well as trade and investment activity.

Source: Hong Leong Investment Bank Research - 15 Jul 2019