Above expectations – Malaysian Industrial Production Index (IPI) in July’18 elevated to +2.6% y-o-y compared to revised IPI of +1.5% y-o-y in June’18. Besides, IPI rebounded to positive growth on monthly basis to +1.8% y-o-y despite last month contraction of -0.1%% m-o-m. The result exceeded our in-house estimate as well as market forecast of +1.5% and +1.4% respectively. The impressive performance of July’s IPI was spurred by higher growths in Manufacturing and Electricity indexes despite contraction in Mining index.

Strong sub-sectors in Manufacturing index lifted IPI growth – Manufacturing sector which was the main contributor of IPI, registering a massive growth of +5.2% y-o-y (vs June’18: +4.5% y-o-y),mainly spurred by strong growths in the most sub-sectors. Transport equipment & other manufacturer led the Manufacturing index growth by posting +13.5% y-o-y in July’18 (vs June’18: +4.7% y-o-y) followed by E&E products: +8.0% y-o-y (vs June’18: +5.4% y-o-y), Woods products, furniture, paper products & printing: +6.0% y-o-y (vs June’18: +5.4% y-o-y) and Petroleum, chemical, rubber & plastic: +4.0% y-o-y (vs June’18: +3.4% y-o-y). However, Textile, wearing apparel, leather & footwear as well as Food, beverages & tobacco growth depleted in this month. Besides, on a monthly basis, Manufacturing sector was little changed, +1.8% m-o-m from +1.6% m-o-m.

Robust Electricity index – The Electricity index spiked up to +4.5% y-o-y in this month as compared to +3.0% in the last month. Likewise, on a month on monthly basis, Electricity index rebounded from negative growth in the previous month to a positive growth of +6.8% for this month (vs June’18 of -4.2%).

Mining sector remained sluggish – Mining sector remarked its negative trajectory for third consecutive months, narrowing its contraction in July’18 to 5.9% y-o-y as compared to -9.4% y-o-y in the previous month. However, on m-o-m comparison, it rebounded from negative growth for third consecutive month to +1.9% m-o-m from -5.5& m-o-m in last month. The sluggish performance of Mining sector was due to diminishing in natural gas (-15.2% y-o-y vs June’18: -15.7% y-o-y) despite higher crude oil (+4.5% y-o-y vs June’18: -2.2% y-o-y).

Manufacturing sales at all time high – Manufacturing sales maintained its upward trajectory, stood at RM70b, which improved +9.6% y-o-y in July’18 (vs June’18: RM67.1b, +7.8% y-o-y). The greater expansion in Manufacturing sales was mainly supported by steady growths in all sub-sectors such as Transport equipment and other manufacturers: +17.3% y-o-y (vs June’18: +10.3% y-o-y), Food, beverage & tobacco: +6.7% y-o-y (vs June’18: +4.0% y-o-y), Non-metallic mineral products, basic metal & fabricated metal products: +7.0% y-o-y (vs June’18: +6.0% y-o-y) as well as E&E products: +12.0% y-o-y (vs June’18: +9.2% y-o-y). Higher manufacturing growth in E&E products was in tandem with global semiconductor sales for the month of July’18, which improved +17.4% y-o-y and +0.4% m-o-m.

Encouraging performance expected in Aug’18 – We envisage IPI to slightly pick up 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 driven 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 - 12 Sept 2018