Below ours but better than market forecast – Malaysia’s Industrial Production Index (IPI) for the month of May’20 eased its contraction to -22.1% y-o-y as compared to -32.0% y-o-y during Apr’20. The results were substantially below our in-house forecast but better than market expectation. Easing contraction was due to improved production across all sub-indexes albeit in modest growths. Moreover, IPI on monthly basis soared +18.2% y-o-y (vs Apr’20: -30.4% m-o-m) in view of recovery in business outputs as most business activities started to operate and run at full capacity during control movement control order (CMCO). Other than that, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) during May’20 rebounded to 45.6 after registering sharp decline of 31.3 during Apr’20. Improved May’20 PMI was buoyed by slower rate of declines in output, new orders and greater employment compared with Apr’20.

Improved productions from both exports and domestic oriented outputs soothed Manufacturing’s contraction – Manufacturing sector which was the highest contributor for industrial production, depleting -23.3% y-o-y as compared to -37.2% y-o-y during Apr’20. For domestic-oriented outputs, Food, beverages & tobacco registered a minor contraction of -2.5% y-o-y (vs Apr’20:-9.0% y-o-y) following improved production in food products (+6.6% y-o-y). Nevertheless, production of beverages and tobacco contracted -40.5% y-o-y and -82.7% y-o-y respectively. Nevertheless, Non-metallic mineral products as well as Transport equipment & other manufacturers dropped -45.1% y-o-y and -38.5% y-o-y respectively (vs Apr’20:-62.7% y-o-y and -69.3% y-o-y) due to sluggish productions in other non-metallic (- 50.7% y-o-y) and other manufacturing (-46.3% y-o-y). Exports-oriented production wise, E&E products (- 11.2% y-o-y vs Apr’20: -34.1% y-o-y), Woods products, furniture, paper products & printing (-39.2% y-o-y vs Apr’20: -68.4% y-o-y) as well as Textiles, wearing apparel, leather & footwear printing (-45.3% y-o-y vs Apr’20: -73.8% y-o-y) narrowed its contraction except for Petroleum, chemical, rubber & plastic products (- 24.3% y-o-y vs Apr’20: -21.4% y-o-y) due to slower production of coke and refined petroleum products (- 43.1% y-o-y) which offset higher production of rubber & plastics products (+9.7% y-o-y).

Mining outputs shrank further despite improve in Electricity – Electricity outputs narrowed its contraction to -10.3% y-o-y in May’20 from -19.3% y-o-y during Apr’20. However, Mining outputs extended its contraction to -22.2% y-o-y from -19.6% y-o-y in view of massive declines in both crude oil & condensate (-22.2% y-o-y) and natural gas (-22.2% y-o-y).

Manufacturing sales also minimized its contraction – Manufacturing sales stood at RM90.2b, which plunged 19.8% y-o-y (vs Apr’20:-33.0% y-o-y). Food, beverages and tobacco returned to the black to +3.9% y-o-y (vs Apr’20:-2.1% y-o-y). Meanwhile, Textiles, Wearing Apparel, Leather & Footwear (-34.4% y-o-y vs Apr’20: -59.7% y-o-y), Non-metallic mineral products, basic metal & fabricated metal products (- 46.8% y-o-y vs Apr’20: -67.5% y-o-y), E&E products (-19.9% y-o-y vs Apr’20: -39.6% y-o-y), Transport Equipment & Other Manufacturers (-29.9% y-o-y vs Apr’20: -69.5% y-o-y) as well as Wood Furniture, Paper Products & Printing (-52.9% y-o-y vs Apr’20: -70.4% y-o-y) narrowed its negative trajectory. Nevertheless, Petroleum, Chemical, Rubber & Plastic extended its negative growth to -11.4% y-o-y from - 9.8% y-o-y in prior month in tandem with its fewer production.

Expecting a subdued IPI for 2020 –– For the following month, we expect IPI contraction to ease further as majority of business entities have started to operate and run at full capacity since recovery movement control order (RMCO) on 10th June. 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 as the outbreak will affect global activities as well as our export-oriented outputs. However, we believe the introduction of stimulus package by government could ease the industry burden and marginally support the production growth. Overall, we cut our 2020 IPI forecast to -5.1% y-o-y (from -3.3% y-o-y previously) as global markets have suffered significant macroeconomic headwinds pursuant to the pandemic. Other downside risk includes relatively low commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 10 Jul 2020