Below expectation – Malaysia’s Industrial Production Index (IPI) in Sept’19 eased to +1.7% y-o-y as compared to +1.9% y-o-y during Aug’19. The result was below our in house and market forecast of +2.0% yoy and +1.8% y-o-y respectively. The moderate production growth during this period was due to slower production in Manufacturing and Mining outputs despite higher Electricity output. However, despite slower IPI production, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) increased to 47.9 during Sept’19 (vs Aug’19: 47.4) following higher new orders, led by improvement in sales to existing customers. During 3Q19, IPI grew +1.6% y-o-y as compared to +4.0% y-o-y in 2Q19 due to subdued production in Manufacturing and Electricity outputs amid contraction in Mining output.

Soft production of both export and domestic-oriented outputs – Manufacturing output which constitutes 68.3% of total production, grew moderately to +2.5% y-o-y in Sept’19 from +3.6% y-o-y in the prior month. Export-oriented products were buoyed by higher production of Woods products, furniture, paper products & printing (+5.8% y-o-y vs Aug’19: +5.6% y-o-y), thanks to higher production in wood and cork. Nevertheless, other outputs were slower such as Textiles, wearing apparel, leather & footwear (+4.0% y-o-y vs Aug’19: +6.0% y-o-y), due to a drop in textiles and wearing apparel productions. Moreover, E&E product production was flat to +0.8% y-o-y (vs Aug’19: +3.1% y-o-y) following minor production in computer, electronics & optical products and machinery & equipment. Besides, production of Petroleum, chemical, rubber & plastic products also eased to +2.1% y-o-y (vs Aug’19: 3.0 y-o-y) following slower production in most of the sub-items. Domestic-oriented production was aided by Transport equipment & other manufacturers which rose to +6.3% y-o-y (vs Aug’19: +5.9% y-o-y) following massive production in other transport equipment as well as motor vehicles, trailers & semi-trailers. However, production growth in Non-metallic mineral products and Food beverages and tobacco products declined to +3.8% y-o-y and +1.5% y-o-y respectively (vs Aug’19: +4.1% y-o-y and +2.4% y-o-y) due to slower basic metals and beverages production.

Electricity production soared but Mining output still in the red – Electricity production soared to +4.9% y-o-y during Sept’19 from a minor growth of +0.3% y-o-y during Aug’19. However, Mining production remains in the red with -1.6% y-o-y growths as compared to -3.9% y-o-y during previous month. Subdued production of mining outputs was due to contraction of crude oil (-4.7% y-o-y vs Aug’19:- 9.5% y-o-y) amid moderate production in natural gas (+1.1% y-o-y vs Aug’19: +1.2% y-o-y).

Manufacturing sub-sectors’ sales trend lower – Manufacturing sales grew +2.9% y-o-y in Sept’19 as compared to +4.7% y-o-y in Aug’19 as most of the sub-sectors saw lower sales such as E&E products (+7.4% y-o-y vs Aug’19: +7.8% y-o-y), Textiles, wearing apparel, leather & footwear (+5.4% y-o-y vs Aug’19: +6.6% y-o-y), Petroleum, chemical, rubber & plastic (+1.4% y-o-y vs Aug’19: +4.1% y-o-y), Nonmetallic mineral products (+6.4% y-o-y vs Aug’19: +6.6% y-o-y), and E&E products (+1.3% y-o-y vs Aug’19: +3.6% y-o-y). Slower E&E products sales were in line with global semiconductor sales reported by Semiconductor Industry Association (SIA) which declined 16.6% y-o-y but improved +3.4% m-o-m. Global semiconductor sales had reported contraction since early this year and we expect global semiconductor sales to remain subdued for the rest of the year. However, sales of Woods products, furniture, paper products and Transport equipment & other manufacturers were higher during this period which up +4.9% y-o-y and +9.1% y-o-y respectively during this period (vs Aug’19: +4.5% y-o-y and +7.2% y-o-y).

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, albeit at a slower pace. As such, we retain our IPI forecast of +2.8% y-o-y for 2019 (vs 2018: +3.0%). 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 Nov 2019