Below-than-expected – Malaysia’s Industrial Production Index (IPI) during Sept’20 rose +1.0% y-o-y (vs Aug’20:+0.3% y-o-y). The result was substantially lower than our in-house and market forecast of +1.8% y-o-y and +2.3% y-o-y respectively. During this period, IPI was spurred by growth in Manufacturing sector despite contraction in Mining and Electricity sectors. Other than that, on monthly basis, IPI experienced little growth, +0.3% m-o-m from -1.1% m-o-m in the prior month. Whilst for Malaysia’s manufacturing Purchasing Managers’ Index (PMI), PMI for the month of Sept’20 eased for three consecutive months to 49 point due to fewer of new orders to its slowest pace in 2020.

Stellar Manufacturing outputs – Manufacturing sector which was the largest component in IPI rose +4.3% y-o-y during Sept’20 from +2.4% y-o-y in the previous month. Manufacturing production was buoyed by improved growths for both domestic and exports oriented outputs. For domestic-oriented outputs, Food, beverages & tobacco production (+4.9% y-o-y vs Aug’20:+4.8% y-o-y) coupled with Transport equipment & other manufacturers (+4.5% y-o-y vs Aug’20:+3.5% y-o-y) registered massive growths, thanks to higher production of tobacco products (+7.6% y-o-y) as well as motor vehicles, trailers & semi-trailers (+13.5% y-o-y). While Non-metallic mineral products eased its contraction to -3.9% y-o-y in Sept’20 from -6.3% y-o-y in Aug’20 in view of improved manufacturing of basic metals (+4.5% y-o-y). Exports-oriented wise, E&E products (+9.8% y-o-y vs Aug’20:+7.1% y-o-y) as well as Petroleum products (+3.2% y-o-y vs Aug’20:+1.7% y-o-y) lifted the growth of domestic-oriented outputs which was underpinned by stellar manufacturing of computer, electronics & optical products couple with rubber & plastics products. Also, Woods products, furniture, paper products & printing rebounded to +2.3% y-o-y (from -2.5% y-o-y previously in Aug’20), spurred by encouraging production of paper and paper products (+5.1% y-o-y). Lastly, Textiles, wearing apparel, leather & footwear fell to single-digit contraction, -4.1% y-o-y (vs Aug’20:-11.0% y-o-y), deteriorated by minor production of leather and related products (-16.8% y-o-y).

Both Mining and Electricity outputs widened contraction – Electricity outputs widened its contraction to -2.1% y-o-y in Sept’20 from -1.2% y-o-y in the previous month. Also, Mining production slumped to -9.6% y-o-y (vs Aug’20:-6.7% y-o-y) following lesser productions in both crude oil & condensate (-9.7% y-o-y) and natural gas (-9.5% y-o-y).

Strong Manufacturing sales – In line with encouraging manufacturing production, manufacturing sales posted stronger growth of +3.7% y-o-y in Sept’20 as compared to +1.7% y-o-y in the last month. Steady manufacturing sales were spurred by higher sales in Food, beverages and tobacco (+14.2% y-o-y vs Aug’20:+12.8% y-o-y), E&E products (+7.2% y-o-y vs Aug’20:+7.1% y-o-y) and Transport Equipment & Other Manufacturers (+14.3% y-o-y vs Aug’20:+16.21% y-o-y). Besides, Textiles, Wearing Apparel, Leather & Footwear (-5.2% y-o-y vs Aug’20:-12.5% y-o-y), Wood Furniture, Paper Products & Printing (- 1.5% y-o-y vs Aug’20:-5.1% y-o-y) as well as Petroleum, Chemical, Rubber & Plastic (-2.3% y-o-y vs Aug’20:-7.0% y-o-y) eased its contraction during this period. Nevertheless, Non-metallic mineral products, basic metal & fabricated metal products maintained its double-digits contraction of -11.4% y-o-y from - 13.6% y-o-y in Aug’20.

Anticipating subdued IPI for 2020 –– For the remaining months in 2H20, we expect IPI to register marginal growth in view of new waves of COVID-19 cases. Overall, we retain our IPI forecast of -3.1% y-oy 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 corona virus 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 wave of COVID-19 pandemic as well as relatively low commodity prices especially the crude oil and CPO.

Source: JF Apex Securities Research - 9 Nov 2020