The Industrial Production Index (IPI) expanded 5.1% YoY in September, far more than consensus and house expectations on better-than-expected performance of the manufacturing sector. Output in the key sector making up nearly two-thirds of industrial production was up 5.6% YoY, a six-month high. The smaller mining sector recovered from a slump in August with 4.4% YoY growth in September. For 3Q15, the IPI grew at a faster pace of 4.5% YoY compared to 4.3% in 2Q15. Manufacturing output growth of 4.7% YoY in 3Q15 from the IPI suggests that value-added manufacturing probably grew more than our GDP estimate. However, this is mitigated by worse-than-expected performance of the larger services sector of the economy, which the Index of Services suggests grew at a slower rate in 3Q15 than in 2Q15 (see accompanying report). We thus expect 3Q15 GDP growth to come in under 5.0% YoY, below our 5.1% house estimate and full-year growth at the lower end of our 5.0% - 5.3% forecast range.

• Industrial production as measured by the IPI expanded 5.1% YoY in September, broadly higher than August growth of 2.3% YoY (revised from 3.0%). Consensus and house expectations were looking at 3.0% and 3.2% growth respectively.
• On a MoM basis, the IPI was up 2.9% in September compared to a 1.7% (revised from 1.0%) contraction in August. The seasonally adjusted index was up 2.4% MoM.
• For 3Q15 as a whole, the IPI grew at a faster pace of 4.5% YoY compared to 4.3% in 2Q15 and the three-month moving average in August of 4.3% (revised from 4.5%). The improvement in industrial production in 3Q15 is in line with our expectations.
• Accounting for nearly two-thirds of the IPI (65.89%), September manufacturing output growth accelerated to 5.6% YoY from 4.3% in August, which is well above our expectations of a moderate increase.
• On a MoM basis, manufacturing increased 3.4% YoY. After seasonal adjustment, manufacturing output showed a MoM increase of 0.1%. On a three-month moving average basis, manufacturing output showed a clear accelerating trend, expanding at a faster pace of 4.7% YoY compared to 4.5% in July. In the 3Q15, the manufacturing index accelerated to 4.7% from 4.1% in the preceding quarter.
• The large, export-oriented Electrical & Electronic
• Products sub-sector grew at a faster pace of 12.2% YoY (August: 11.8%) despite latest data showing a 2.8% YoY decline in global semiconductor shipments in September. Other main manufacturing sub-sectors showed lackluster growth.
• In a separate report, manufacturing sales for September grew 5.4% YoY to RM58.5b. The biggest increase in sales value was seen in the manufacture of electrical and electronic components and the manufacture of consumer electronics, due to currency translation gains from the sharply weaker ringgit.
• The typically volatile mining sector returned to positive growth after contracting 3.4% YoY in August. The September rebound of 4.4% YoY and resulting 3Q15 growth of 4.7% is consistent with our GDP estimate.
• Electricity output, which has the smallest weightage in the IPI (5.19%), increased 2.6% YoY on a 1.9% MoM decline.

Source: Kenanga Research - 11 Nov 2015