Above market expectations but below ours – Malaysian June’19 Industrial Production Index (IPI) grew +3.9 y-o-y as compared to +4.0% y-o-y in May’19. The result is slightly above market expectation of +3.8% while below our in house forecast of +4.2%. June’19 IPI was underpinned by higher Mining production despite soothing Manufacturing and Electricity productions. On a separate note, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) in June’19 dropped to 47.8, from 48.8 in May’19 as manufacturing outputs were still restricted in June’19 due to challenging demand conditions, notably from exports markets. As for 1H19, IPI was little changed to +3.3% y-o-y against +3.4% y-o-y in 1H18 as the growth was mainly underpinned by Electricity: +5.1% y-o-y (vs 1H18: +3.8% y-o-y), Manufacturing: +4.1% y-o-y (vs 1H18: +4.9% y-o-y) and Mining: +0.6% y-o-y (vs 1H18: -1.3% y-o-y) outputs.

Slower manufacturing index weighed down by soft production in export and domestic oriented sectors – Manufacturing production which is the largest contributor for industrial production were eased to +3.8% y-o-y from +4.3% y-o-y in last month. For export-oriented sectors, most of the sub-sectors posted marginal growths such as E&E products (+3.5% y-o-y vs May’19: +3.7% y-o-y), Petroleum, chemical, rubber & plastic products (+3.0% y-o-y vs May’19: +3.2% y-o-y), Woods products, furniture, paper products & printing (+4.7% y-o-y vs May’19: +6.5% y-o-y) and Textiles, wearing apparel, leather & footwear (+5.5% y-o-y vs May’19: +5.8% y-o-y). Meanwhile for domestic-oriented sectors, Transport equipment & other manufacturers and Food, beverages & tobacco registered moderate growths of +5.6% y-o-y and +3.9% y-o-y respectively (from +6.9% y-o-y and +4.4% y-o-y) due to slower productions in Other manufacturing products, Repair & installation of machinery & equipment, Food, Beverages and Tobacco products. Nevertheless, Non-metallic mineral products, basic metal & fabricated metal recorded higher figure, +4.8% y-o-y from +3.8% y-o-y in the prior month, thanks to higher production of Other non-metalic mineral products, Basic metals and Fabricated metal products, except machinery & equipment. During 6M19, Manufacturing sectors grew +4.1% y-o-y as compared to +4.9% y-o-y in 6M18 as mainly buoyed by production of Woods products, furniture, paper products & printing: +5.4% y-o-y (vs 6M18: +3.9% y-o-y) and Transport equipment & other manufacturers: +6.5% y-o-y (vs 6M18: +4.0% y-o-y).

Steady growth for Mining outputs but Electricity losing its momentum – Mining sectors maintained its steady growth, which grew higher to +4.6% y-o-y as compared to +3.0% y-o-y in the previous month, chiefly attributable to higher natural gas production (+13.0% y-o-y vs May’19: +7.6% y-oy) which offset the contraction of crude oil production (-3.7% y-o-y vs May’19: -2.0% y-o-y). However, during 6M19, mining outputs only grew +0.6% y-o-y from -1.3% y-o-y in 6M18. In spite of the relatively stable figures Mining outputs, Electricity output only gain +1.7% y-o-y from +5.7% y-o-y in last month. As for 6M19, Electricity index rose +5.8% y-o-y versus +3.8% y-o-y from the same period a year ago.

Manufacturing sub-sectors’ sales value remained high – Manufacturing sales value in June’19 stood at RM70.6b, growing +5.3% y-o-y from +6.7% y-o-y in the previous month. Manufacturing sales value during this period was underpinned by higher growths in Petroleum, chemical, rubber & plastic and Nonmetallic mineral products, basic metal & fabricated metal which increased +5.5% y-o-y and +7.4% y-o-y respectively (vs May’19: +5.3% y-o-y and +7.0% y-o-y). However, other sub-sectors sales were slightly soothed such as Food, beverage & tobacco: +7.6% y-o-y (vs May’19: +8.1% y-o-y), Textiles, wearing apparel, leather & footwear: +5.8% y-o-y (vs May’19: +9.8% y-o-y), Woods products, furniture, paper products & printing: +2.2% y-o-y (vs May’19: +9.2% y-o-y), E&E products +4.0% y-o-y (vs May’19: +6.4% y-o-y) and Transport equipment & other manufacturers: : +8.0% y-o-y (vs May’19: +11.6% y-o-y). Weaker E&E products sales were in tandem with global semiconductor sales reported by Semiconductor Industry Association (SIA) which contracted -16.8% y-o-y and -0.9% m-o-m in June ’19. Besides, global semiconductor sales in 1H19 also tumbled to -14.5% y-o-y, dented by tumbling semiconductor sales across all major regional markets and semiconductor product categories.

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 maintain our 2019 forecast for IPI at +3.0 y-o-y. 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 Aug 2019