Industrial production in May rose by 6.0%, above market expectations of 4.2%. This is due to a robust growth from manufacturing, backed by continued expansion in the electrical and electronics (E&E) and transport equipment & machinery sectors. Production is seen to remain steady for the rest of the year though partly dampened due to a high base effect and downside effects of a moderate domestic consumption. Nonetheless, this would be partly mitigated by production of exporting goods on strong demands from the US and parts of Europe and to fulfill local demand on projects under the ETP. Growth upside is a possibility but for now we are retaining our GDP forecast at 5.5% for 2014.

- Industrial production in May rose by 6.0% YoY, stronger than the revised 4.9% (4.2% previously) gained in April. This beat market expectations for a 4.2% increase. Based on the 3-month moving average (3mma), production moderated slightly, growing by 5.1% from 5.3% previously. On a monthly comparison, production increased by 3.2% MoM whilst the seasonally adjusted index saw a 0.6% MoM expansion. For the first five months of the year, industrial production increased by an average of 5.1% YoY, in comparison to 2.2% seen in the same period in 2013.

- The manufacturing sector grew by 7.8%, higher than the revised 5.0% (4.0% pre-revision) in the previous month and by 6.4% based on the 3mma, a more moderate pace compared to April’s 7.0%. Compared to the previous month, manufacturing increased by 3.5% MoM whilst the seasonally adjusted index saw an expansion of 0.4% MoM. Year-to-date saw a 6.7% YoY growth, versus 2.7% in the same period in 2013.

- In detail, the production of petroleum, chemical, rubber & plastic products (25% share of manufacturing) saw a 3.3% decline in production, a smaller fall compared to 3.9% in April, though remains a positive 6.4% MoM monthly expansion. At 16.6% share of total manufacturing, the manufacturing of electrical and electronics (E&E) goods expanded by 9.8% in May, a more moderate pace from revised 15.2% (14.2% pre-revision) seen in April. On a monthly comparison, production of E&E products increased by 0.6% MoM. Regardless of the moderation in May, we expect this sector to be particularly strong for much of the year, boosted by overseas demand. E&E exports had averaged at 13.5% YoY growth since the start of the year, and we reckon the upward trajectory will continue.

- The production of non-metallic mineral products, basic metal and fabricated metal products (7.5% of total manufacturing) rose by 3.6% YoY, from 3.9% previously but it fell by 1.4% MoM. The transportation equipment & other manufactures sub-sector expanded by 78.3%, back to double-digit expansion from 3.3% in the previous month. It rose by 8.4% MoM. This subsector and sector related to major infrastructure project ought to remain robust, though may face tapering on account of a high base effect.

- On a side note, manufacturing sales in May increased by 5.5%, a slower growth compared to a revised 7.8% in April (7.7% previously). On a monthly comparison, sales fell by 0.4% MoM though remains a positive 0.7% based on the seasonally adjusted value.

- Production in the mining sector increased by a more moderate pace of 1.4% YoY, following a 4.7% increase in April. This is on account of a decline in the production of natural gas (-0.4% from +3.5 in April) and a more moderate growth of the extraction of crude petroleum & condensates (3.1% from 5.8% previously). However, there was a 2.4% MoM increase in overall mining.

- Electricity production grew by 4.6% YoY (April: 3.9%) and by 3.2% MoM, in tandem with the expansion in output from the manufacturing sector.

- Industrial production is expected to remain steady for the rest of the year, boosted by production for exports and continuous works on ETP projects. This should help mitigate downside effects from a moderate domestic demand in the 1H14, which should slowly start to recover in the 2H14. A combination of a strong kickoff in the start of the year, continued recovery in developed economies and a rebound in domestic consumption, we believe 2014 GDP could surpass our estimate. However, we are cautious on another subsidy rationalization dragging domestic demand, the downside risks of China’s economic restructuring, and deflationary threat in Europe, hence we are keeping our GDP forecast at 5.5% for the whole of 2014.

Source: Kenanga