Below expectations – Mar’20 Malaysia’s Industrial Production Index (IPI) turned to negative growth of - 4.9% y-o-y (vs Feb’20: +5.8% y-o-y), substantially below our in-house and market expectation of -2.0% yo-y and -3.0% y-o-y respectively. Disappointing IPI growth for the month of Mar’20 was dented by subdued productions from all sub-sectors. However, monthly IPI was little change to +0.1% m-o-m (vs Feb’20: +7.0% m-o-m). In tandem with slower production, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) during Mar’20 dropped further to 48.4 (from 48.5 during Feb’20). For 1Q20, IPI grew +0.4% y-o-y as compared to +2.9% y-o-y during 1Q19 in view of contractions in both Mining and Electricity indexes coupled with minor growth in Manufacturing index.

Manufacturing outputs weighed down by slower productions from exports and domestic oriented outputs – Manufacturing sector which was the main contributor for industrial production, depleting -4.2% y-o-y as compared to +5.6% y-o-y during Feb’20. For exports-oriented outputs, most of sub-industries showed negative trajectory growths such as E&E products (-5.0% y-o-y vs Feb’20: +7.0% yo-y), Woods products, furniture, paper products & printing (-6.1% y-o-y vs Feb’20: +6.3% y-o-y) and Textiles, wearing apparel, leather & footwear printing (-1.2% y-o-y vs Feb’20: +6.7% y-o-y) amid moderate growth in Petroleum, chemical, rubber & plastic products (+3.6% y-o-y vs Feb’20: +6.3% y-o-y) in view of slower outputs of machinery & equipment, paper & paper products, textiles and chemicals & chemical products. Domestic-oriented production wise, all of its sub-components showed negative growths namely Food beverage & tobacco (-9.9% y-o-y vs Feb’20: +4.5% y-o-y), Non-metallic mineral products (- 9.9% y-o-y vs Feb’20: +4.5% y-o-y) as well as Transport equipment & other manufacturers (-10.2% y-o-y vs Feb’20: +4.9% y-o-y) arising from lower production in tobacco products, other non-metallic mineral products and other transport equipment. For 1Q20, manufacturing sector rose +1.3% y-o-y as compared to +4.0% y-o-y during 1Q19.

Mar’20 Electricity and Mining outputs returned to the red – Electricity production returned to contraction of -7.0% y-o-y during Mar’20 as compared to +6.8% y-o-y in Feb’20. As for 1Q20, electricity index depleted -0.4% y-o-y from +5.8% y-o-y during 1Q19. Moreover, Mining production posted contraction as well to -6.5% y-o-y from +6.1% y-o-y in Feb’20 due to contraction in both crude oil & condensate (-7.1% y-o-y vs Feb’20: -0.5% y-o-y) as well as natural gas (-6.0% y-o-y vs Feb’20: +12.0% yo-y). For 1Q20, mining extended its negative growth -1.8% y-o-y from 1.2% y-o-y in correspondence quarter a year ago.

Manufacturing also depleted – In tandem with mild manufacturing production, manufacturing subsectors’ performance also posted a contraction of -3.0% y-o-y from previous stellar growth of +7.0% y-o-y during Feb’20. Subdued manufacturing sales was due to contractions in Food, beverages and tobacco (- 5.9% y-o-y vs Feb’20: +7.2% y-o-y), Textiles, Wearing Apparel, Leather & Footwear (-5.0% y-o-y vs Feb’20: +8.6% y-o-y), Wood Furniture, Paper Products & Printing (-5.8% y-o-y vs Feb’20: +5.9% y-o-y), Non-metallic mineral products, basic metal & fabricated metal products (-4.4% y-o-y vs Feb’20: +6.4% y-oy), E&E products (-5.7% y-o-y vs Feb’20: +5.5% y-o-y), and Transport Equipment & Other Manufacturers (-7.4% y-o-y vs Feb’20: +5.8% y-o-y) except for Petroleum, Chemical, Rubber & Plastic (+4.9% y-o-y vs Feb’20: +9.4% y-o-y).

Expecting a subdued IPI for 2020 –– For the following month, we expect IPI to extend its negative growth in view of slower business outputs arising from government's Movement Control Order (MCO) which has taken effect since middle March of 2020 and further extended till early June’20. However, we expect business production to recover gradually during May’20 as most business activities started to operate as government has eased the MCO. For full year 2020, we foresee IPI to grow at a negative growth 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 as our export-oriented outputs. However, we believe introduction of stimulus package by government could ease the industry burden and marginally support the production growth. Therefore, we cut our 2020 IPI forecast to -2.2% y-o-y (from +1.8% y-o-y previously) as global markets have suffered significant macroeconomic headwinds pursuant to the pandemic. Other downside risk includes lower commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 13 May 2020