Below expectations – Malaysia’s Industrial Production Index (IPI) started 2020 with a minor growth, only growing +0.6% y-o-y in Jan’20 as compared to +1.3% y-o-y in Dec’19. IPI growth was below ours and market expectation in view of easing momentum in Manufacturing and Mining production coupled with contraction in Electricity production. Also, Jan’20 IPI also grew +0.6% m-o-m as compared to +1.8% m-om in last month. Moreover, in tandem with easing IPI growth, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) in Jan’20 also slowed to 48.8 from 50 from Dec’19 in view of lower output order deteriorated by slower global trading business.

Contraction in Food production – Manufacturing sector rose +2.1% y-o-y in Jan’20 as compared to +3.4% y-o-y in Dec’19. For export-oriented production, two subindustries eased their growths such as Woods products, furniture, paper products & printing (+3.0% y-o-y vs Dec’19:+4.9 % y-o-y) and Textiles, wearing apparel, leather & footwear printing (+3.2% y-o-y vs Dec’19:+4.9 % y-o-y) following minor productions in paper & paper products as well as leather & related products. Meanwhile, Petroleum, chemical, rubber & plastic products recorded same growths as the previous month which was +3.6% y-o-y (vs Dec’19:+3.6% y-o-y), buoyed by growths in coke & refined petroleum products, chemicals & chemical products as well as basic pharmaceutical products. Moreover, E&E production registered a higher growth of +3.2% y-o-y (vs Dec’19: +3.1% y-o-y) in view of massive production in computer, electronics & optical products. Domestic-oriented production wise, productions of food products, basic metals as well as motor vehicles, trailers & semi-trailers were slower which led to sooth growths in Food beverages & tobacco (+5.6% y-o-y vs Dec’19:+0.6 % y-o-y), Non-metallic mineral products (+3.9% y-o-y vs Dec’19:+4.6% y-oy) and Transport equipment & other manufacturers printing (+1.4% y-o-y vs Dec’19:+4.7 % y-o-y).

Electricity output turned to the red; Mining output narrowed its contraction – Electricity production turned to the red for the first time since May’17, registered a minor contraction of -0.01% y-o-y in first month of 2020 (vs Dec’19: +0.9% y-o-y). On the same note, Mining production narrowed its contraction to -3.9% y-o-y from -4.9% y-o-y in prior month dented by subdued growth in crude oil & condensate (-5.9% y-o-y vs Dec’19:-6.6% y-o-y) coupled with natural gas (-2.3% y-o-y vs Dec’19:-3.4% yo-y).

Food, beverages and tobacco sales dropped further – In tandem with slower manufacturing output, manufacturing sub-sectors’ sales also grew slower at +2.6% y-o-y during Jan’20 from +5.2% y-o-y during Dec’19. Subdued sales was due to massive drop in food, beverages and tobacco sales (-7.5% y-o-y vs Dec’19: -1.8% y-o-y) as well as other sub-sectors such as Textiles, Wearing Apparel, Leather & Footwear (+2.8% y-o-y vs Dec’19: +6.4% y-o-y), Wood Furniture, Paper Products & Printing (+2.5% y-o-y vs Dec’19: +6.4% y-o-y), Non-metallic mineral products, basic metal & fabricated metal products (+4.7% y-oy vs Dec’19: +6.5% y-o-y), and Transport Equipment & Other Manufacturers (+1.3% y-o-y vs Dec’19: +8.8% y-o-y). However sales of Petroleum, Chemical, Rubber & Plastic and E&E products were higher by +6.9% y-o-y and +4.3% y-o-y respectively (vs Dec’19:+5.8% y-o-y and +2.9% y-o-y). ). Amid higher domestic E&E production, global semiconductor sales recorded by Semiconductor Industry Association (SIA) also narrowed its negative sales growth to -0.3% y-o-y from -5.5% y-o-y during Dec’19.

Expecting a subdued 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 Covid-19 coronavirus outbreak. We expect industrial production in 1Q20 in negative trajectory as the outbreak will affect global activities as well our export-oriented outputs. However, we believe introduction of stimulus package of RM20b by government could ease the industry burden and to support the production growth. Overall, we cut our 2020 IPI forecast to +1.8% y-o-y from +2.5% y-o-y previously as global markets suffer significant macroeconomic headwinds pursuant to the pandemic. Moreover, other downside risk includes lower commodity prices especially crude oil and CPO.

Source: JF Apex Securities Research - 16 Mar 2020