Below expectations – October’s Industrial Production Index (IPI) exceeded our in-house and market expectation (Ours: +3.5% y-o-y; Market: +3.0% y-o-y) substantially, growing higher to +4.2% y-o-y as compared to +2.3% y-o-y in the previous month. The better performance was underpinned by higher growth in Manufacturing and Mining sectors. Besides, on a monthly basis, IPI rebounded to +4.6% m-o-m in Oct’18 from -0.3% m-o-m in Sept’18.

Stellar Transport equipment production lifted Manufacturing goods output – Manufacturing sector in Oct’18 improved for third consecutive month to +5.4% y-o-y, compared to +4.8% y-o-y in the last month. Better manufacturing production was mainly spurred by stellar growth in Transport equipment & other manufacturer: +10.1% y-o-y (vs Sept’18: +2.3% y-o-y), E&E products: +7.1% y-o-y (vs Sept’18: +5.5% y-o-y), Petroleum, chemical, rubber & plastic: +4.1% y-o-y (vs Sept’18: +3.8% y-o-y) and Woods products, furniture, paper products & printing: +4.1% y-o-y (vs Sept’18: +3.8% y-o-y). Despite robust performance of our E&E products, global semiconductor sales however slightly moderated from +12.7% yo-y and +2.0% m-o-m in Sept’18 to +12.7% y-o-y and +1.0% m-o-m in Oct’18. Aside from that, production of Food, beverages & tobacco eased to +2.6% y-o-y from +6.9% y-o-y in prior month. Besides, on monthly comparison, Manufacturing index improved from +1.2% m-o-m to +2.2% m-om in Oct’18.

Mining sector returned to the black – Mining sector registered a positive growth after posting a contraction for fifth consecutive month, elevated to +1.4% y-o-y in Oct’18 as compared to -6.2% y-o-y in Sept’18. The soaring mining production was aided by recovery in both crude oil and natural gas production. Crude oil improved +0.4% y-o-y from -6.3% y-o-y in last month while natural gas lifted +2.3% y-o-y from -6.2% y-o-y. Besides, on a monthly comparison, Mining sector boosted to 13.7% m-o-m (vs Sept’18: -3.2% m-o-m).

Electricity index grew at a modest mode – The Electricity index moderated to +2.1% y-o-y in Oct’18 as compared t0 +4.2% y-o-y in Sept’18. However, on a monthly basis, electricity index rebounded from contraction (Sept’18: -6.3% m-o-m) to expansion (+3.9% m-o-m).

Encouraging Manufacturing sales – In tandem with the massive growth in manufacturing sector, industrial sales stood at RM73.1b in Oct’18 (from RM70.8b) which chalked up +10.2% y-o-y growth (vs Sept’18: +8.2% y-o-y), thanks to greater sales expansion for most of the sub-sectors. Among the subcomponents which showed higher sales were Wood furniture, paper products & printing: +6.3 % y-o-y (vs Sept’18: +4.6% y-o-y), Petroleum, chemical, rubber & plastic: +11.5 % y-o-y (vs Sept’18: +10.4% y-o-y), Non-metallic mineral products, basic metal & fabricated metal: +5.3 % y-o-y (vs Sept’18: +5.1% y-o-y), E&E products: +11.5% y-o-y (vs Sept’18: +9.1% y-o-y) and Transports equipment & other manufacturers: +13.3 % y-o-y (vs Sept’18: +3.1% y-o-y).

Another resilient growth expected in Nov’18 IPI –– We envisage IPI growth to improve further in the following month underpinned by steady growth in most indexes. We believe the demand for E&E products to remain healthy as supported by strong global demand. As such, we maintain our IPI forecast of 3.5% for 2018. The 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 could derail the global trade thus affecting our IPI performance.

Source: JF Apex Securities Research - 13 Dec 2018