Above expectations – Malaysia’s Industrial Production Index (IPI) in May’19 registered the same growth as the previous month which was +4.0% y-o-y, significantly higher than ours and market expectation. On monthly basis, growth in IPI was +3.2% m-o-m (vs Apr’19: -2.8% m-o-m). May’19 IPI was supported by strong growth in all Manufacturing, Mining and Electricity sectors. On a separate note, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) in May’19 dropped to 48.8, from 49.4 in Apr’19.

Manufacturing outputs buoyed by steady productions in both export and domestic oriented sectors – Manufacturing outputs which constituted 68.3% from total industrial production grew +4.2% y-o-y in May’19 as compared to +4.3% y-o-y in Apr’19. For export-oriented sectors, both Textiles, wearing apparel, leather & footwear and Woods products, furniture, paper products & printing posted a sturdy growth to +5.8% y-o-y and +6.5% y-o-y respectively from +5.7% y-o-y and +5.2% y-o-y respectively in prior month, thanks to higher production in leather & related products as well as furniture. Nevertheless, E&E products and Petroleum, chemical, rubber & plastic products slightly soothed to +3.7% y-o-y and +3.2% y-o-y respectively (vs Apr’19: +4.1% y-o-y and +3.6% y-o-y). Slower production in E&E products was due to lower manufacturing of electrical equipment despite higher manufacturing of computer, electronics & optical products and machinery & equipment n.e.c. Domestic-oriented wise, Food, beverages & tobacco increased despite moderate growth in Transport equipment & other manufacturers and Nonmetallic mineral products, basic metal & fabricated metal productions. Food, beverages & tobacco increased to +4.7% y-o-y from +4.2% y-o-y in last month, backed by food products and beverages outputs. Nevertheless, Non-metallic mineral products, basic metal & fabricated metal as well as Transport equipment & other manufacturers slightly eased due to moderate production in other non-metallic mineral products, basic metals, as well as repair and installation of machinery and equipment.

Mining outputs expanded its growth amid strong Electricity outputs – Mining sectors registered a positive growth for two consecutive months to +3.0% y-o-y (vs Apr’19; +2.3% y-o-y), thanks to higher growth in natural gas which up +7.6% y-o-y (vs Apr’19: +6.1% y-o-y). However, production of crude oil remained in the red with -2.0% y-o-y as compared to -1.9% y-o-y in last month. Apart from that, growth in Electricity output also higher to +5.7% y-o-y as compared to +5.8% y-o-y in Apr’19.

Manufacturing sub-sectors’ sales values remained high – Manufacturing sales value remained high in May’19, which stood at RM69.7B which grew +6.7% y-o-y (vs Apr’19: +6.8% y-o-y). Food, beverages & tobacco, Textiles, wearing apparel, leather & footwear; Wood furniture, paper products & printing; and Transport equipment & other manufacturers grew substantially higher during this period albeit slower growth in Petroleum, chemical, rubber & plastic; Non-metallic mineral products, basic metal & fabricated metal and E&E products. Subdued E&E products were in tandem with global semiconductor sales reported by Semiconductor Industry Association (SIA) which contracted 14.6% y-o-y but slightly improved +1.9% m-o-m in May’19.

Expecting minor IPI growth in 2019 –– We expect IPI to expand moderately in 2019 as we reckon slight growths in most of the sub-sectors, in tandem with slowing global economic growth. However, we believe manufacturing production will remain as the main contributor to IPI, driven by E&E products albeit at a slower pace. Overall, we forecast 2019 IPI to grow at +3.0 y-o-y. The performance for IPI will be underpinned 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 - 15 Jul 2019