Exceeding expectation – Malaysia’s Industrial Production Index (IPI) for the month of July’20 rebounded to +1.2% y-o-y (vs -0.4% y-o-y for the month of June’20). The result was higher than ours and market expectation of +0.5% y-o-y and +1.0% y-o-y respectively. On monthly basis, IPI rose +1.2% m-om compared to +27% m-o-m in June’20. During this period, IPI was spurred by massive production of manufacturing outputs despite sluggish mining and electricity outputs. For July’s Malaysia’s manufacturing Purchasing Managers’ Index (PMI), it grew 50 points as compared to 51.0 points in previous month.

Steady manufacturing production amid modest growth – Manufacturing sector, major contributor to industrial production grew +2.9% y-o-y as compared to +4.7% y-o-y in June’20. For domestic-oriented outputs, only Non-metallic mineral products showed substantial contraction of -9.8% y-o-y (vs June’20: - 14.2% y-o-y) in view of slower production of fabricated metal products, except machinery & equipment. Nevertheless, Food, beverages & tobacco together with Transport equipment & other manufacturers improved +3.6% y-o-y vs +9.0% y-o-y respectively (vs June’20: +10.5% y-o-y and +10.7% y-o-y respectively), thanks to stellar production of tobacco products as well as motor vehicles, trailers and semitrailers. Exports oriented wise, E&E products rose +9.6% y-o-y (vs June’20: +13.2% y-o-y) in view of higher outputs of electrical equipment. Besides, Petroleum, chemical, rubber & plastic products registered same growth as previous month which was +1.5% y-o-y, buoyed by higher production of rubber & plastics products as well as basic pharmaceutical products & pharmaceutical preparations. Nevertheless, Woods products, furniture, paper products & printing registered a minor growth (+0.8% y-o-y vs June’20: +7.3% y-o-y) underpinned by production in paper & paper products. However, Textiles, wearing apparel, leather & footwear printing extended negative trajectory from -9.6% y-o-y in prior month to -12.9% y-o-y following fewer production of leather & related products.

Improved Mining outputs whilst widening Electricity – Electricity outputs expanded its contraction to -5.1% y-o-y from -2.4% y-o-y in June’20. Meanwhile, Mining outputs minimized its drop again for three consecutive months to -3.0% y-o-y from -17.1% y-o-y, no thanks to less productions of both crude oil & condensate (-1.2% y-o-y) and natural gas (-4.4% y-o-y).

Manufacturing sales eased – Manufacturing sales softened to +1.9% y-o-y in July’20 as compared to +4.1% y-o-y in June’20. July’20 manufacturing sales was underpinned by steady sales in Food, beverages and tobacco (+24.9% y-o-y vs June’20: +25.3% y-o-y), E&E products (+8.4% y-o-y vs June’20: +12.3% y-o-y) and Transport Equipment & Other Manufacturers (+14.3% y-o-y vs June’20: +14.4% y-o-y). However, other components showed sluggish in sales such as Textiles, Wearing Apparel, Leather & Footwear (-12.8% y-o-y vs June’20: -12.2% y-o-y), Wood Furniture, Paper Products & Printing (-4.1% y-oy vs June’20: -3.9% y-o-y), Petroleum, Chemical, Rubber & Plastic (-14.2% y-o-y vs June’20: -7.2% y-o-y) and Non-metallic mineral products, basic metal & fabricated metal products (-15.1% y-o-y vs June’20: - 20.8% y-o-y).

Expecting a subdued IPI for 2020 –– For the 2H20, we expect IPI to register marginal growth buoyed by improved production across sub-sectors mainly Manufacturing sector. Overall, we retain our IPI forecast of -3.1% y-o-y in 2020. 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 risks include second waves of COVID-19 pandemic as well as relatively low commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 13 Sept 2020