OVERVIEW

• February’s IPI unexpectedly slower. While the expansion in the IPI was higher at 4.7% than January’s 3.5% growth, it was below median Bloomberg’s consensus forecast of 6.1% and the house estimates of 7.5%. On a MoM basis, the IPI fell 5.8% (Jan: -4.6%).
• Robust manufacturing sector. The manufacturing sector saw a solid 6.5% growth (Jan: 4.6%) supported mainly by E&E, Petroleum, Chemical, Rubber and Plastic Product and the F&B Sector. The mining sector, meanwhile, continued to grow at a slower pace of 0.4% (Jan: 1.1%) from a sharper deterioration in crude petroleum production. 
• Industrial production on the mend. Continued resilience in E&E manufacturing, stronger external demand – based on February’s export figures – and stronger manufacturing data will provide some support to industrial production. This, along with the regional recovery, will reinforce the case for a stronger industrial production in the coming months. 

Manufacturing pushes growth to a slight upside. Improvements in the headline production, strong growth in exports, resilient manufacturing sales growth points to a slight upside to the manufacturing sector’s real growth (1Q17E : 4.7%) and, by extension, the headline GDP figures.

February IPI expands at an unexpectedly slower pace of 4.7% YoY after taking a breather in January at 3.5%. It fell below Bloomberg’s median consensus estimate of 6.1% (2.5-11.0%) and the house’s estimate of 7.5%. On a MoM basis, IPI fell 5.8% (Jan: -4.6%), par for the course given seasonal declines typically observed in February. However, on a seasonally-adjusted basis, the IPI expanded by a stronger 2.0% (Jan: -1.1%). The positive IPI growth largely came from manufacturing sector expansion – mining sector growth moderated for the second consecutive month while the electricity sector growth was little changed.

Manufacturing picks up pace. The manufacturing sector growth (65.9% of headline IPI) started picking up pace with an expansion of 6.5% (Jan: 4.6%), equalling its recent peak growth during November 2016. On a MoM basis, the sector contracted 4.3% (Jan: -5.3%) likely due to seasonal factors. After seasonal adjustment, the manufacturing IPI grew 2.0% (Jan: 0.8%).

Broad-based growth across manufacturing sectors. Most of the subsectors within the manufacturing sub-index saw higher growth during February, with the notable exception of the Transport Equipment and Other Manufactures sub-sector which moderated. Key contributors to February’s manufacturing sector growth include a speedier 8.1% expansion in E&E manufacturing (Jan: 6.9%). Similar to January, the manufacturing sector saw further support from food, beverage and tobacco, petrol, and chemical, rubber and plastic product subsectors and to a lesser extent, manufacture of wood products, furniture, paper products and printing. Food, beverages and tobacco manufacture accelerated to a 33-month high with a 16.0% growth (Jan: 6.9%).

Manufacturing sales growth bumped up. In a separate report, manufacturing sales grew by a faster 15.7% YoY (Jan: 10.7%) to RM59.4b. However, manufacturing sales slipped 2.8% MoM (Jan: -0.5%) from seasonal factors. After adjusting for seasonal factors, manufacturing sector grew by a stronger 6.0% MoM. Growth largely came from higher sales in refined petroleum product, from electrical capacitor, resistor, circuit board and display and motor vehicles. The modest manufacturing sales growth reaffirms our belief that its contribution to headline growth figures would be moderate at best.

Mining production flat. The mining sector (28.9% of the headline IPI) continued to show a moderating growth trend at 0.4% YoY from 1.1% in January. Slow-to-flattish growth in mining production occurred as the index saw a 4.7% deterioration on the crude oil production (Jan: -2.3%) though a modest 7.0% expansion in natural gas production (Jan: 5.3%) helped prop up the overall mining sub-index. On a MoM basis, mining factor production was further dragged down by seasonal fluctuations leading to a more severe contraction of 9.7% (Jan: -3.3%). After seasonal adjustment, the MoM decline was more subdued at 0.3% MoM (Jan: -3.2%).

Electricity output expands. Electricity sector (5.2% of headline IPI) grew by a slightly faster 1.5% (Jan: 1.0%). The electricity sub-index contracted by a faster 6.7% MoM (Jan: - 2.0%) though seasonally adjusted, the sub-index saw a marginal 0.5% expansion.

Catching up on regional recovery. Malaysia is arguably a laggard in riding the global manufacturing recovery as most of its regional partners have reported strengthening underlying manufacturing sector health as measured by March PMI figures. Malaysia stands out as the only ASEAN economies, of the seven countries covered by Markit, reporting sub-50.0 reading with a PMI reading of 49.5 for March (Feb: 49.4). The headline ASEAN PMI numbers stand at 50.9 (Feb: 50.3) with Vietnam and the Philippines topping the list at 54.6 and 53.8 points respectively. Beyond its ASEAN backyard, Malaysia also trails the stronger manufacturing sector recovery in China and Japan (reporting PMI of 51.2 and 52.4 points respectively) though Malaysia’s PMI reading was better than South Korea’s reading of 48.4 points. Beyond Asia, global headline PMI was sustained at 53.0 points while the Eurozone and the US also reported strong PMI reading of 56.2 and 53.3 points respectively.

OUTLOOK

Manufacturing sector on track to recovery. The disparity in PMI reading between Malaysia and its regional neighbours suggests that there are some upsides for the Malaysian manufacturing sector as it starts seeing a more strident recovery moving forward. In particular, we are upbeat with the continued strength on the E&E sector. This is further supported by improvements in E&E-related manufacturing sales which suggest improvements on the demand side of the equation. The sharp 26.5% increase in exports also points to strengthening external demand which may provide a further push to the manufacturing sector.

Mining sector to remain weak. As per our previous report, we believe that the mining sub-index will continue to see subdued growth throughout 1H17. Malaysia’s participation in OPEC’s voluntary oil production cut and the high weightage of crude oil production in the mining index will continue to weigh on the sector, especially if the cuts are further extended past 1H17. However, we retain our cautious optimism that the mining sector will reap long-term benefits from renewed investments in the petroleum mining sector as oil prices continue to stabilise. Overall, despite the downturn in mining sector production, we believe that it will be mitigated by the strong recovery in the manufacturing sector, particularly from E&E production.

On track to strong recovery. With the continued strength in the manufacturing sector, we see some upside to our 4.7% growth estimate for the value-added manufacturing sector (2017F : 4.5% vs. 2016: 4.4%). This will likewise translate into an upside to our 1Q17 GDP growth estimate of 4.4% in the absence of other drags to the supply side – with the exception of the mining sector, which is expected to remain weak.

Source: Kenanga Research - 12 Apr 2017