Below expectation – Malaysia’s Industrial Production Index (IPI) climbed +1.9% y-o-y in Aug’19 from +1.2% y-o-y in July’19. Despite posting a higher growth from the prior month, Aug’19 IPI however was substantially below our in-house and market forecast. Aug’19 IPI growth was banking on better production in the Manufacturing and Electricity indexes, recording a modest growth despite contraction in Mining. On a separate note, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) in Aug’19 soothed to 47.4, from 47.6 in July’19.

Mixed production growth from both export and domestic-oriented outputs – Manufacturing output, which is the biggest contributor to total industrial production (68.3%), eased to +3.7% y-o-y as compared to +4.0% y-o-y in July’19. Export-oriented products was underpinned by higher production in Woods products, furniture, paper products & printing (+5.9% y-o-y vs July’19: +5.6% y-o-y) and Textiles, wearing apparel, leather & footwear (+6.0% y-o-y vs July’19: +5.8% y-o-y) following higher production in Printing & reproduction of recorded media, Furniture, Wearing apparel and Leather & related products.

However, production in E&E products (+3.5% y-o-y vs July’19: +4.9% y-o-y) and Petroleum, chemical, rubber & plastic products (+2.8% y-o-y vs July’19: +3.4% y-o-y) were slightly lower during this period due to uninspiring production in Computer, electronics & optical products, Coke & refined petroleum products, Basic pharmaceutical products & pharmaceutical preparations as well as Rubber & plastics products.

Domestic-oriented production was spurred by Food beverages and tobacco products (+2.9% y-o-y vs July’19: +0.8% y-o-y) as well as Transport equipment & other manufacturers (+5.9% y-o-y vs July’19: +5.8% y-o-y), thanks to stellar production in Machinery and equipment n.e.c., Motor vehicles, trailers & semi-trailers, Other manufacturing and Repair/installation of machinery & equipment. Nevertheless, Nonmetallic mineral products, basic metal & fabricated metal were little changed at +4.3% y-o-y( vs July’19: +4.4% y-o-y) due to drop in Basic metals and Fabricated metal products, except machinery & equipment production.

Electricity production soothed; Mining outputs narrowed contraction – Electricity output posted little growth at +0.3% y-o-y during Aug’19 (vs July’19: +2.0% y-o-y). Moreover, Mining output narrowed its decline from -8.4% y-o-y in July’19 to -3.9% y-o-y in Aug’19. Contraction in mining output was due to sluggish crude oil which tumbled -9.5% y-o-y (vs July’19: -22.7% y-o-y) despite minor growth in natural gas (+1.2% y-o-y vs July’19: +7.3% y-o-y).

Manufacturing sub-sectors’ sales easing its momentum – Manufacturing sales value dropped to RM73.7b in Aug’19 from RM74.2b in last month, after growth slowed to +4.7% y-o-y from +6.0% y-o-y in July’19. Slower manufacturing sales was due to by lower sales in Petroleum, chemical, rubber & plastic (+4.1% y-o-y vs July’19: +5.9% y-o-y), Non-metallic mineral products (+6.6% y-o-y vs July’19: +7.4% yo-y) and E&E products (+3.6% y-o-y vs July’19: +5.8% y-o-y). Notably, slower E&E products sales was in tandem with global semiconductor sales reported by Semiconductor Industry Association (SIA) which declined 15.9% y-o-y but improved +2.5% m-o-m. However, sales of Food, beverage & tobacco, Textiles, wearing apparel, leather & footwear, Woods products, furniture, paper products and Transport equipment & other manufacturers were higher during this period.

Expecting minor IPI growth in 2019 –– We expect IPI to expand moderately in 2019 as we reckon small 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. Following the softened eight months IPI growth, we cut our 2019 forecast for IPI to +2.8% yo-y from +3.0 y-o-y previously. 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 - 14 Oct 2019