Below expectations – Malaysia’s Industrial Production Index (IPI) in June’18 eased to +1.1% y-o-y as compared to +3.0% y-o-y in May’18. Meanwhile, IPI growth tumbled to -0.4% m-o-m on monthly basis (vs May’18: +3.0% m-o-m). The result was below our in-house expectation of +3.6% y-o-y and market consensus of +3.2% y-o-y. The slower June’18 IPI expansion was due to sluggish performance in mining index. As for 1H18, IPI soothed to +2.8% as compared to +3.9% in 1H17 due to moderate growth in mining and manufacturing indexes.

Disappointing Mining sector – Mining sector widened its negative growth to -9.4% y-o-y in June’18 (vs May’18: -0.5% y-o-y) while registered -2.2% y-o-y in 1H18 (vs 1H17:-0.5% y-o-y). Besides, on monthly basis, IPI depleted to negative trajectory, to -5.4% m-o-m compared to +3.1% m-o-m in previous month. The sluggish June’18 IPI expansion was mainly dented by natural gas, which slipped -15.7% y-o-y (vs May’18: -4.8% y-o-y) and crude oil, -2.2% y-o-y (vs May’18: +4.7% y-o-y).

Better growth in Manufacturing amid slower IPI growth – The Manufacturing sector which constituted 68.3% to total IPI, improving +4.5% y-o-y in June’18 as compared to +4.1% y-o-y in May’18. The greater performance in manufacturing sector was underpinned by growths in Food, beverages & tobacco (+3.5% y-o-y vs May’18: +3.3% y-o-y), Textile, wearing apparel, leather & footwear (+6.1% y-o-y vs May’18: +2.1% y-o-y), Woods products, furniture, paper products & printing (+6.1% y-o-y vs May’18: +2.1% y-o-y), Woods products, furniture, paper products & printing (+5.4% y-o-y vs May’18: +2.7% y-oy), Non-metallic mineral products, basic material & fabricated metal products (+5.2% y-o-y vs May’18: +5.0% y-o-y). However, index for Manufacturing sector softened to +1.6% m-o-m in June’18 (vs May’18:+3.1% m-o-m) while grew +4.9% y-o-y in 1H18 (vs 1H17:+6.0% y-o-y).

Higher Electricity index – The Electricity index elevated to +3.0% y-o-y in this month as compared to +2.6% in the previous month. Besides, electricity index showed a sturdy growth of +3.8% y-o-y in 1H18 as compared to +0.9% y-o-y in 1H17. However, on a monthly basis, the reading dropped to negative growth of -4.2% m-o-m after showing a positive growth of +2.5% m-o-m in last month.

Soaring Manufacturing sales – Manufacturing sales in June’18 stood at RM67.1, soaring to +7.8% y-o-y as compared to +5.5% y-o-y in the previous month. The greater expansion in Manufacturing sales was mainly supported by steady growths in all sub-sectors such as Transport equipment and other manufacturers: +10.3% y-o-y (vs May’18: -0.8% y-o-y), Food, beverage & tobacco: +4.0% y-o-y (vs May’18: +0.4% y-o-y), Textile, wearing apparel, leather & footwear: +6.2% y-o- y (vs May’18: -0.3% y-oy) and Wood, furniture, paper products & printing: +6.0% y-o-y (vs May’18: +4.0% y-o-y), Petroleum, chemical, rubber & plastic +7.3% y-o-y (vs May’18: +6.87% y-o-y) and non-metallic mineral products, basic metal & fabricated metal products +6.0% y-o-y (vs May’18: +4.3% y-o-y). Also, manufacturing sales in 1H18 increased to +6.8% y-o-y to RM396.5m.

Stellar E&E products – E&E products grew higher in June’18 to +5.4% y-o-y (vs May’18: +4.8%). Besides, sales of E&E product also widened to +9.2% y-o-y in June’18 (vs May18: +7.5%). This was in line with recent data released by Semiconductor Industry Association (SIA) in which June’s global semiconductor sales increased by +20.5% y-o-y and +1.5% m-o-m.

Moderate growth expected in July’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 Aug 2018