Below forecasts – Aug’20 Malaysia’s Industrial Production Index (IPI) eased to +0.3% y-o-y from +1.2% y-o-y in July’20, which was marginally underneath our in-house and market forecasts. IPI during Aug’20 was underpinned by easing momentum in manufacturing production amid contractions in both mining and electricity outputs. As compared to the prior month, Aug’20 depleted to -1.1% m-o-m (vs July’20: +1.1% y-o-y) due to less production in manufacturing products. On a separate note, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) for the month of Aug’20 was marginally down to 49.3 in view of weak foreign demand arising from limitation of respective export markets.

Sluggishness in Manufacturing production – Manufacturing sector, the key sector for industrial production eased its momentum for three consecutive months, which grew +2.4% y-o-y in Aug’20 as compared to +2.9% y-o-y in July’20. Domestic-oriented outputs were underpinned by stellar growths in Transport equipment & other manufacturers (+6.9% y-o-y vs July’20: +4.8% y-o-y) in view of higher production of motor vehicles, trailers and semi-trailers (+17.9% y-o-y). Nevertheless, it was offset by mild growths in Food, beverages & tobacco production (+4.7% y-o-y vs July’20:+6.3% y-o-y) as well as Nonmetallic mineral products (-6.3% y-o-y vs July’20:-9.8% y-o-y) in view of slower outputs of beverages (- 10.4% y-o-y) and fabricated metal products (-10.7% y-o-y). Exports-oriented wise, only E&E products coupled with Petroleum, chemical, rubber & plastic products showed positive growths. E&E products rose +6.9% y-o-y from +9.8% y-o-y on the back of stellar manufacturing of computer, electronics and optical products. Also, Petroleum products (+1.7% y-o-y vs July’20: +1.5% y-o-y) was spurred by production in rubber and plastics products. However, Woods products, furniture, paper products & printing tumbled to contraction, -2.5% y-o-y (vs July’20: +0.8% y-o-y) after posting positive growth for two consecutive months due to mild production in wood & products of wood & cork. Besides, Textiles, wearing apparel, leather & footwear printing retained its double-digit contraction (-11.0% y-o-y vs July’20: -12.9% y-o-y), no thanks to disappointing production of leather & related products.

Mining output widened its contraction despite narrowing Electricity output – Electricity outputs narrowed its contraction in Aug’20 to -1.2% y-o-y (vs July’20: -5.1% y-o-y). While, Mining outputs were extended its contraction to -6.7% y-o-y (vs July’20: -3.0% y-o-y) in view of major contractions in both crude oil & condensate (-5.0% y-o-y) and natural gas (-8.0% y-o-y).

Manufacturing sales also moderated – In tandem with slowing manufacturing outputs, manufacturing sales registered mild growth of +1.7% y-o-y from +1.9% y-o-y due to sluggish sales in Textiles, Wearing Apparel, Leather & Footwear (-12.5% y-o-y vs July’20:-12.8% y-o-y), Wood Furniture, Paper Products & Printing (-5.1% y-o-y vs July’20:-4.1% y-o-y), Petroleum, Chemical, Rubber & Plastic (-7.0% y-o-y vs July’20:+0.5% y-o-y) as well as Non-metallic mineral products, basic metal & fabricated metal products (- 13.6% y-o-y vs July’20:-15.1% y-o-y). Nevertheless, sales of Food, beverages and tobacco (+12.8% y-o-y vs July’20:+14.8% y-o-y), Transport Equipment & Other Manufacturers (+16.2% y-o-y vs July’20:+14.3% y-o-y) as well as E&E products (+7.1% y-o-y vs July’20:+8.4% y-o-y) were stellar during this period.

Anticipating subdued IPI for 2020 –– For 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 new waves of COVID-19 pandemic as well as relatively low commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 13 Oct 2020