Below expectations – Malaysia’s Industrial Production Index (IPI) for the final month of 2019 eased to +1.3% y-o-y (vs Nov’19: +2.0% y-o-y) which substantially below our in-house and market’s forecasts. Moderate IPI during this period was due to slower production in Mining and Electricity indexes which offset higher production in Manufacturing indexes. Besides, on a monthly basis, IPI declined to -0.4% m-o-m in Dec’19 from +1.8% y-o-y in prior month. Despite easing momentum of IPI in Dec’19, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) in Dec’19 grew to 50.0 (vs Nov’19: 49.5) making its highest reading since Oct’18.

For the full year of 2019, IPI grew +2.4% y-o-y (vs 2018:+3.1%), marginally below our in house forecast of +2.5% y-o-y. 2019’s industrial production was underpinned by higher outputs in Manufacturing and Electricity sectors despite sluggish output in Mining sector.

2019 Manufacturing production losing its momentum; stellar outputs recorded during Dec’19 – Manufacturing sector recorded slower production in 2019 (+3.6% y-o-y vs 2018:+4.8% y-o-y). Full year manufacturing output was buoyed by steady production from export-oriented production namely Woods products, furniture, paper products & printing (+5.4% y-o-y vs 2018:+4.7% y-o-y) and Textiles, wearing apparel, leather & footwear (+5.3% y-o-y vs 2018:+4.3% y-o-y). For Dec’19, manufacturing outputs rose +3.4% y-o-y from +2.5% y-o-y in Nov’19, thanks to massive production in E&E products (+3.1% y-o-y vs Nov’19: +1.1% y-o-y) and Petroleum, chemical, rubber & plastic products (+3.6% y-o-y vs Nov’19: +2.0% y-o-y) from export-oriented outputs while Non-metallic mineral products (+4.6% y-o-y vs Nov’19: +3.7% y-o-y) and Transport equipment & other manufacturers (+4.7% y-o-y vs Nov’19: +4.3% y-o-y) from domestic-oriented outputs. Higher export and domestic outputs was due to higher production of machinery and equipment, rubber & plastics products, basic metals and other manufacturing.

Full year Electricity production also eased; Mining output narrowed its contraction – Electricity production grew +3.4% y-o-y in 2019 as compared to +3.7% y-o-y in 2018. In Dec’19, electricity output was little change at +0.9% y-o-y from +1.6% y-o-y in last month. Meanwhile, Mining production narrowed its contraction to -1.8% y-o-y during 2019 (vs 2018: -2.1% y-o-y). However, mining outputs for the month of Dec’19 fell back into the red at -4.9% y-o-y from +0.5% y-o-y in Nov’19 following lower outputs in both crude oil (-6.6% y-o-y vs Nov’19:-3.3% y-o-y) and natural gas (-3.4% y-o-y vs Nov’19:+3.7% y-o-y).

Manufacturing sub-sectors’ sales grew 5.0% y-o-y – Manufacturing sub-sectors’ sales grew +5.0% y-o-y to RM866b. Meanwhile, manufacturing sales in Dec’19 posted a stellar growth of 5.2% y-o-y (vs Nov’19: +2.3% y-o-y), thanks to higher sales from its sub-sectors such as Food products (+9.5% y-o-y vs Nov’19: +8.9% y-o-y), Textiles, Wearing Apparel, Leather & Footwear (+8.3% y-o-y vs Nov’19: +7.3% yo-y), Wood Furniture, Paper Products & Printing (+5.7% y-o-y vs Nov’19: +5.4% y-o-y), Petroleum, Chemical, Rubber & Plastic (+5.9% y-o-y vs Nov’19: -0.6% y-o-y), Non-metallic mineral products, basic metal & fabricated metal products (+7.2% y-o-y vs Nov’19: +6.8% y-o-y), E&E products (+2.7% y-o-y vs Nov’19: +1.6% y-o-y) and Transport Equipment & Other Manufacturers (+7.7% y-o-y vs Nov’19: +5.3% yo-y). Despite higher domestic E&E production, global semiconductor sales recorded by Semiconductor Industry Association (SIA) contracted -5.5% y-o-y and -1.7% m-o-m. For the full year, global semiconductor sales tumbled -12.1% y-o-y and are expected to moderate in 2020.

Expecting soothing IPI for 2020 –– For 2020, we foresee IPI to grow at a modest mode as we expect production activities to be dampened by the prevailing Wuhan coronavirus outbreak. We expect industrial production in 1Q20 to be moderate as the outbreak will affect global activities as well our export-oriented outputs. Therefore we cut our 2020 IPI forecast to +2.5% y-o-y from +2.8% y-o-y previously. Moreover, other downside risk included prolonged trade war between the US and China and lower commodity price.

Source: JF Apex Securities Research - 10 Feb 2020