Exceeding expectations – Malaysia’s Industrial Production Index (IPI) soared by +2.0% y-o-y during second last month of 2019 (vs Oct’19: +0.3% y-o-y), which was marginally above ours and market forecast of +1.8% y-o-y and +1.1% y-o-y respectively. Stellar industrial outputs during the period were boosted by improved production with all of its sub-sectors. In tandem with higher IPI, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) during Nov’19 also grew higher to 49.5 (vs Oct’19: 49.3) making this its highest reading since Sept’18.

Manufacturing production regained its growth – Manufacturing output, which was the major contributor for total industrial production (68.3%), increased +2.5% y-o-y during Nov’19 from +2.2% y-o-y in Oct’19, thanks to massive growths of its sub-components except for E&E products. For export-oriented production, all its sub-components showed higher production growth namely Textiles, wearing apparel, leather & footwear couples (+6.4% y-o-y vs Oct’19: +5.4% y-o-y), Woods products, furniture, paper products & printing (+5.5% y-o-y vs Oct’19: +4.6% y-o-y) and Petroleum, chemical, rubber & plastic products (+2.0% y-o-y vs Oct’19: +1.0% y-o-y) in view of higher production of wearing apparel, furniture as well as rubber & plastics products. However, E&E products output registered a slower growth of +1.1% y-o-y compared with +2.4% y-o-y in Oct’19 due to minimal production of computer, electronics & optical products. Domestic-oriented wise, massive production growth recorded in Transport equipment & other manufacturers (+4.3% y-o-y vs Oct’19: +4.3% y-o-y), Non-metallic mineral products (+3.7% y-o-y vs Oct’19: +3.1% y-o-y) and and Food, beverages & tobacco products (+2.2% y-o-y vs Oct’19: +0.8% y-o-y), thanks to robust production of other manufacturing, basic metals and beverages.

Electricity production surged; Mining output rebounded from contraction – Electricity production surged +1.6% y-o-y during Nov’19 (vs Oct’19: +0.5% y-o-y). On the same note, Mining production rebounded from contraction to +0.5% y-o-y during this period from -5.8% y-o-y in Oct’19, thanks to higher production in natural gas (+3.7% vs Oct’19:-6.3% y-o-y) which offset contraction in crude oil (-3.3% y-o-y vs Oct’19:-5.1% y-o-y).

Minor growths in Manufacturing sub-sectors’ sales – Manufacturing sales in Nov’19 registered a little growth of +2.3% y-o-y from +2.2% y-o-y in Oct’19. Manufacturing sales during this period was underpinned by higher sales in Food products (+8.9% y-o-y vs Oct’19: +6.7% y-o-y), Textiles, wearing apparel, leather & footwear (+7.3% y-o-y vs Oct’19: +6.0% y-o-y), Woods products, furniture, paper products (+5.4% y-o-y vs Oct’19: +3.7% y-o-y) and Non-metallic mineral products, basic metal & fabricated metal products (+6.8% y-o-y vs Oct’19: +5.5% y-o-y). However, sales of E&E products and Transport Equipment & Other Manufacturers eased to +1.6% y-o-y and +5.3% y-o-y respectively (vs Oct’19: +2.1% y-o-y and +6.8% y-o-y). Moderate sales of E&E products were in line with Nov’19 global semiconductor sales recorded by Semiconductor Industry Association (SIA) which tumbled -10.8% y-o-y and -0.3% m-o-m. Moreover, sales of Petroleum, chemical, rubber & plastic narrowed its contraction to - 0.6% y-o-y (vs Oct’19: -1.0% y-o-y).

Expecting IPI to grow at +2.5% in 2019, +2.8% in 2020 –– We expect IPI to expand +2.5% in 2019 (vs 2018: +3.0% y-o-y) in view of small growths in most of the sub-sectors and in tandem with slowing global economic growth. We believe manufacturing production remains as the main contributor to IPI, albeit at a slower pace. For 2020, we expect IPI to grow slightly higher to +2.8% y-o-y underpinned by steady growth in manufacturing production as well as recovery in mining production. We expect manufacturing production will be driven by improved public and private consumption which lead to higher domestic demand while steady commodity price to boost mining production. However, we opine that prolonged trade war between the US and China could derail the global trade thus affecting IPI performance.

Source: JF Apex Securities Research - 13 Jan 2020