Better than expectation – Malaysia’s Industrial Production Index (IPI) during June’20 registered a marginal contraction of -0.4% y-o-y (vs May’20: -22.1% y-o-y), which is substantially better than ours and market expectation of -12% y-o-y and -10.4% y-o-y respectively. On monthly basis, June’20 IPI soared +27% m-o-m (vs May’20: +18.2% m-o-m). Better-than-expected result was underpinned by rebound in Manufacturing index as well as soothing contractions in Electricity and Mining indexes. For the first half of 2020, IPI contracted -8.8% y-o-y (vs 1H19: +3.3% y-o-y) bogged down by contraction in Mining (-10.5% y-o-y), Manufacturing (-8.7% y-o-y) and Electricity (-5.4% y-o-y). For Malaysia’s manufacturing Purchasing Managers’ Index (PMI), PMI during June’20 soared to 51 (vs May’20: 45.6) exceeding threshold of 50 for the first time since Dec’19. Improved June’20 Malaysia PMI was spurred by business entities that have operated and run at full capacity during recovery movement control order (RMCO).

Stellar Manufacturing production – Manufacturing sector, the major player in total industrial production rebounded to +4.7% y-o-y (vs May’20: -23.3% y-o-y) after showing contraction for three consecutive months. For domestic-oriented outputs, Food, beverages & tobacco coupled with Transport equipment & other manufacturers registered positive growth during June’20 which soared +10.5% y-o-y and +10.7% y-o-y respectively (vs May’20: -2.5% y-o-y and -38.5% y-o-y respectively). Higher production growths from both components were spurred by higher production in food products (+17.6% y-o-y) and motor vehicles, trailers & semi-trailers (+20.1% y-o-y). However, production of Non-metallic mineral products retreat -14.3% y-o-y (vs May’20: -45.1% y-o-y) due to fewer production in fabricated metal products, except machinery & equipment (-21.6% y-o-y). Meanwhile for exports-oriented production, E&E products (+13.2% y-o-y vs May’20: -11.2% y-o-y), Woods products, furniture, paper products & printing (+7.1% y-o-y vs May’20: -39.2% y-o-y) as well as Petroleum, chemical, rubber & plastic products (+1.6% y-o-y vs May’20: -24.3% y-o-y) rebound to positive growth underpinned by higher production in machinery & equipment (+19.7% y-o-y), furniture (+18.1% y-o-y) and rubber & plastics products (+40.2% y-o-y). In contrast, Textiles, wearing apparel, leather & footwear printing contracted -9.6% y-o-y (vs May’20: -45.3% y-o-y) in view of easing production of leather & related products (-16.5% y-o-y).

Both Mining and Electricity outputs easing its negative trajectories – Electricity outputs narrowed its contraction to -2.4% y-o-y during June’20 as compared to -10.3% y-o-y during the prior month. On the same note, Mining outputs minimized its contraction to -17.1% y-o-y during June’20 (vs May’20:-22.2% y-o-y) in view of massive declines in both crude oil & condensate (-21.1% y-o-y) and natural gas (-13.5% y-o-y).

Soaring Manufacturing sales – In tandem with stellar manufacturing outputs, manufacturing sales soared +4.1% y-o-y (vs May’20: -19.8% y-o-y) buoyed by Food, beverages and tobacco (+25.3% y-o-y vs May’20: +3.9% y-o-y), E&E products (+12.7% y-o-y vs May’20: -19.9% y-o-y) and Transport Equipment & Other Manufacturers (+23.1% y-o-y vs May’20: -29.9% y-o-y). Nevertheless, Textiles, Wearing Apparel, Leather & Footwear (-12.2% y-o-y vs May’20: -34.4% y-o-y), Wood Furniture, Paper Products & Printing (- 15.9% y-o-y vs May’20: -52.9% y-o-y), Petroleum, Chemical, Rubber & Plastic (-2.6% y-o-y vs May’20: - 11.4% y-o-y) and Non-metallic mineral products, basic metal & fabricated metal products (-31.8% y-o-y vs May’20: -46.8% y-o-y) has narrowed its sales contraction.

Expecting a subdued IPI for 2020 –– For the 2H20, we expect IPI to register marginal growth buoyed by steady production across sub-sectors mainly Manufacturing. Following higher-than-expected IPI result in June’20, we narrowed our IPI forecast contraction from -5.1% y-o-y to -3.1% y-o-y in view of higher production ahead in 2H20, arising from recovery external demand. Overall, we foresee 2020 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. Other downside risk includes relatively low commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 10 Aug 2020