Substantially above expectations – Malaysia’s Industrial Production Index (IPI) for the month of February 2020 soared +5.8% y-o-y (vs Jan’20: +0.6% y-o-y), substantially exceeded our in house and market expectation. Robust Feb’20 IPI was spurred by stellar productions in all sub-sectors namely Mining, Manufacturing and Electricity. However, monthly IPI was deteriorated -7.0% m-o-m as compared to +0.6% m-o-m during Jan’20. Despite soaring IPI growth, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) during Feb’20 dropped to 48.5 (from 48.8 during Jan’20) following shortfall of inputs and falling exports order from China due to Covid-19 pandemic.

Stellar Manufacturing outputs…… – Manufacturing sector which was the main sector for industrial production, rose +5.6% y-o-y during Feb’20 from +2.2% y-o-y during Jan’20 arising from massive production from both export and domestic oriented production. For export-oriented production, among the sub-industries which showed higher productions were E&E products (+5.1% y-o-y vs Jan’20: +3.2% y-oy), Petroleum, chemical, rubber & plastic products (+6.3% y-o-y vs Jan’20: +3.6% y-o-y), Woods products, furniture, paper products & printing (+6.3% y-o-y vs Jan’20: +3.0% y-o-y) as well as Textiles, wearing apparel, leather & footwear printing (+6.7% y-o-y vs Jan’20: +3.2% y-o-y) following higher production in machinery and equipment, rubber & plastics products, wood & products of wood & cork, except furniture; manufacture of articles of straw & plaiting materials and wearing apparel. Domestic-oriented production wise, Food products rebounded from contraction to +4.5% y-o-y (vs Jan’20: -5.6% y-o-y) underpinned by higher manufacture of beverages, food and tobacco products. Moreover, Non-metallic mineral products as well as Transport equipment & other manufacturers printing also surged to +6.2% y-o-y and +4.9% y-o-y respectively (vs Jan’20: +3.9% y-o-y and +1.4% y-o-y respectively), thanks to higher outputs from basic metals and other manufacturing.

……as well as Electricity output; Whilst Mining output halted its contraction – Electricity production rebounded to +6.8% y-o-y during Feb’20 after recorded its first contraction since May’17 during Jan’20 (-0.01% y-o-y). On the same note, Mining production halted its contraction after posted negative growth for two consecutive months. Mining during Feb’20 grew +6.1% y-o-y as compared to -3.9% y-o-y during Jan’20 in view of stellar growth in natural gas (+12% y-o-y vs Jan’20: -2.3% y-o-y) despite minor contraction in crude oil & condensate (-0.5% y-o-y vs Jan’20:-5.9% y-o-y).

Massive manufacturing sales – Manufacturing sub-sectors’ performance also recorded stellar sales to RM110.6b, growing +7% y-o-y in Feb’20 against +2.6% y-o-y during prior month - Food, beverages and tobacco (+7.2% y-o-y vs Jan’20: -7.2% y-o-y), Textiles, Wearing Apparel, Leather & Footwear (+8.6% y-oy vs Jan’20: +2.8% y-o-y), Wood Furniture, Paper Products & Printing (+5.9% y-o-y vs Jan’20: +2.5% y-oy), Non-metallic mineral products, basic metal & fabricated metal products (+6.4% y-o-y vs Jan’20: +4.7% y-o-y), Transport Equipment & Other Manufacturers (+5.8% y-o-y vs Jan’20: +1.3% y-o-y), Petroleum, Chemical, Rubber & Plastic (+9.4% y-o-y vs Jan’20: +6.1% y-o-y) as well as E&E products (+5.5% y-o-y vs Jan’20: +4.3% y-o-y). In tandem with stellar domestic E&E products sales, global semiconductor sales reported by Semiconductor Industry Association (SIA) also jumped +5% y-o-y during Feb’20 despite slower on monthly basis (-2.4% m-o-m).

Expecting a subdued IPI for 2020 –– For the following month, we expect IPI growth to be substantially lower in view of slower business outputs arising from government's Movement Control Order (MCO) which has taken effect since middle March of 2020. For full year 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 minimal growth of industrial production in 1Q20 as the outbreak will affect global activities as well our export-oriented outputs. However, we believe introduction of stimulus package by government could ease the industry burden and to support the production growth. Overall, we maintain our 2020 IPI forecast of +1.8% y-o-y (from 2.4% y-o-y during 2019) as global markets suffer significant macroeconomic headwinds pursuant to the pandemic. Moreover, other downside risk includes lower commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 14 Apr 2020