Substantially below forecast – Malaysia’s Industrial Production Index (IPI) in July’19 eased to +1.2% yo-y (vs June’19: +3.9% y-o-y) due to slower Mining and Electricity indexes which offset higher growth in the Manufacturing index. The result was substantially below our in-house and market forecast. On a separate note, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) in July’19 dropped to 47.6, from 47.8 in June’19.

Growth in Manufacturing index lifted by export-oriented production – Manufacturing production, which constitutes 68.3% of total industrial production, grew +4.0% y-o-y as compared to +3.8% y-o-y in the prior month. Higher manufacturing production was spurred by higher production in export oriented outputs such as E&E products (+4.9% y-o-y vs June’19: +3.5% y-o-y), Petroleum, chemical, rubber & plastic products (+3.4% y-o-y vs June’19: +3.0% y-o-y), Woods products, furniture, paper products & printing (+5.6% y-o-y vs June’19: +4.7% y-o-y) and Textiles, wearing apparel, leather & footwear (+5.8% y-o-y vs June’19: +5.5% y-o-y). Domestic-oriented production was slightly lower due to slower production in Food, Beverages and Tobacco products (+0.7% y-o-y vs June’19: +3.9% y-o-y) and Non-metallic mineral products, basic metal & fabricated metal (+4.4% y-o-y vs June’19: +3.9% y-o-y) due to sluggish production in manufacturing of food products, beverages and tobacco products as well as manufacture of other non-metallic mineral products and fabricated metal products except machinery & equipment. However, Transport equipment & other manufacturers rose +5.8% y-o-y as compared to +5.6% y-o-y in June’19 following higher production in other manufacturing and repair & installation of machinery & equipment.

Electricity production regained its growth but Mining outputs fell into the red – Electricity output rose to +2.0% y-o-y after easing to +1.7% y-o-y last month. However, Mining sector depleted to - 8.4% y-o-y in July’19 (vs June’19: +4.6% y-o-y) after posting a positive growth for three consecutive months. The subdued mining output was due to sluggish crude oil which tumbled -22.7% y-o-y (vs June’19: -3.7% y-o-y) which offset growth of natural gas (+7.3% y-o-y vs June’19: +13.0% y-o-y).

Manufacturing sub-sectors’ sales improved – Manufacturing sales value in July’19 stood at RM74.2b, having improved +6.0% y-o-y from +5.3% y-o-y during last month. Manufacturing sales value during this period was buoyed by higher sales in Textiles, wearing apparel, leather & footwear (+6.2% y-o-y vs June’19: +5.8% y-o-y), Woods products, furniture, paper products & printing (+4.4% y-o-y vs June’19: +2.2% y-o-y), Petroleum, chemical, rubber & plastic (+5.9% y-o-y vs June’19: +5.5% y-o-y) and E&E products (+5.8% y-o-y vs June’19: +4.0% y-o-y). Despite higher domestic E&E products sales, global semiconductor sales reported by Semiconductor Industry Association (SIA) contracted -15.5% y-o-y but improved slightly to +1.7% m-o-m during July ’19. Nevertheless, sales Food, beverage & tobacco as well as Transport equipment & other manufacturers were moderated slightly to +7.2% y-o-y and +5.4% y-o-y respectively from +7.6% y-o-y and +8.0% y-o-y respectively. Besides, sales of Non-metallic mineral products such as basic metal were unchanged from previous month (+7.4% y-o-y vs June’19: +7.4% y-oy).

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. 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 - 12 Sept 2019