Within market expectations – Malaysia’s Industrial Production Index (IPI) grew at a slower pace in May’18 to +3.0% y-o-y (vs Apr’18:+4.6% y-o-y). However, on a monthly basis, May’18 IPI rebounded from a negative growth to +3.1% m-o-m as compared to -3.6% m-o-m in the previous month. The result was within market expectation but below our in-house estimate. The languid expansion was due to moderate growths in all main indexes.

Slowdown in Manufacturing sector – The Manufacturing sector in May’18 eased to +4.1% y-o-y as compared to +5.3% y-o-y in Apr’18 underpinned by soft growths in Food, beverages & tobacco (+3.3% yo-y vs Apr’18: +4.6% y-o-y), Non-metallic mineral products, basic material & fabricated metal products (+5.0% y-o-y vs Apr’18: +5.1% y-o-y), Textile, wearing apparel, leather & footwear (+2.1% y-o-y vs Apr’18: +3.9% y-o-y) and Transport equipment and other manufacturers (+5.0% y-o-y vs Apr’18: +7.8% y-o-y). However, index for Manufacturing sector improved on a monthly basis to +3.1% m-o-m in Apr’18 after posting a contraction for three consecutive months.

Manufacturing sales abated – Manufacturing sales in May’18 stood at RM65.3b, slipped to +5.5% y-o-y as compared to +8.2% y-o-y in the previous month. The soothing expansion in Manufacturing sales was mainly supported by moderate growths in most of sub-sectors such as Transport equipment and other manufacturers: -0.8% y-o-y (vs Apr’18: +5.5%), Food, beverage & tobacco: +0.4% y-o-y (vs Apr’18: +6.4%), Textile, wearing apparel, leather & footwear: -1.3% y-o- y (vs Apr’18: +0.04%) and Wood, furniture, paper products & printing: +4.0% y-o-y (vs Apr’18: +5.1%) However, sales in Petroleum, chemical, rubber & plastic and non-metallic mineral products, basic metal & fabricated metal products improved in May’18 to +6.8% y-o-y and +4.3% y-o-y respectively (vs Apr’18: +6.3% y-o-y; +0.7% y-o-y).

E&E products trended lower – E&E products grew moderately in May’18 to +4.8% y-o- (vs Apr’18: +7.1%). Besides, sales of E&E product also tapered off to +7.5% y-o-y in May’18 (vs Apr’18: +13.9%). However, recent data released by Semiconductor Industry Association (SIA)’s indicated that May’s global semiconductor sales increased by +21.0% y-o-y (vs Apr’18: +20.2% y-o-y) and +3.0% m-o-m (vs Apr’18: +1.4% m-o-m).

Declining Electricity index – The Electricity index registered a soft growth to +2.6% y-o-y in this month as compared to +5.8% in the previous month. However, on a monthly basis, the reading rebounded from a negative growth recorded in the last month to +2.5% m-o-m (vs Apr’18: -1.2%).

Lower Mining sector – The Mining sector tumbled -0.5% y-o-y May’18 despite a positive growth of +3.1% m-o-m on a monthly basis (vs Apr’18: +1.9% y-o-y; -8.1% m-o-m). The Mining sector was mainly dented by contraction in natural gas (-4.8% y-o-y vs Apr’18: -0.4% y-o-y). However, crude oil growth soared to +4.7% y-o-y (vs Apr’18: +4.4% y-o-y).

Moderate growth expected in June’18 IPI– We envisage IPI to grow at a moderate pace in the following month, still underpinned by growth in manufacturing index (mainly E&E products). We believe demand for E&E products to remain healthy as supported by strong global demand. Therefore, we maintain our IPI forecast at 4.0% for 2018. The resilient performance for IPI will be spurred by uptick in commodity prices as well as sustainable global semiconductor sales. However, we opine that prevailing trade war between the US and China/Europe could derail the global trade thus affecting our IPI performance.

Source: JF Apex Securities Research - 13 Jul 2018