Kenanga Research & Investment

Malaysia Industrial Production - Slightly Off a Notch in March, Manufacturing Slowed But Mining Up Slightly

kiasutrader
Publish date: Fri, 12 May 2017, 04:03 PM

OVERVIEW

  • March’s IPI below expectation. IPI growth was slightly lower at 4.6% (Feb: 4.7%), falling below Bloomberg’s median consensus forecast and the house estimate of 4.8%. The IPI rose by 11.0% on a MoM basis (Feb: -5.7%).
  • Manufacturing sector growth moderates. The manufacturing sector saw a 5.9% growth (Feb: 6.6%) driven by the 8.5% growth in the E&E segment with auxiliary support from petroleum, chemical, rubber and plastic segment and wood products, furniture, paper product and printing subsector.
  • Mining growth surprise. Despite continued deterioration in the crude oil sub-index, the mining sector eked out a 2.0% growth (Feb: 0.4%) as the expansion in natural gas subindex partially mitigated the decline in crude oil subindex.
  • Industrial production to support growth upside. While March IPI growth was a touch lower than February’s figures, overall, IPI for 1Q17 (+4.3%) is supportive of a revitalised industrial production narrative. More importantly the YoY growth expansion of the 1Q17 manufacturing sector to 5.6% from 5.0% in 4Q16 supports a better growth story for 1Q17. Along with the sharp turnaround in agriculture sector growth and sustainable services sector performance, we believe that this further justify the revision of our GDP growth estimate to 5.0% for 1Q17 from our recent adjustment to 4.8%.

IPI growth moderates. The IPI grew by a slower clip of 4.6% (Feb: 4.7%), slightly below Bloomberg’s median consensus (ranging from 3.5-6.5%) and the house forecast of 4.8%. On a MoM basis, IPI rebounded sharply by 11.0% (Feb: -5.7%), typical of seasonal effects in March. On a seasonally-adjusted basis, the IPI shrunk 0.7% (Feb: +2.1%). As usual, growth was largely driven by the manufacturing sector though the mining sector helped provide a mild boost to IPI growth. March’s figures bring 1Q17 industrial production growth to 4.3%, lower than 4Q16’s growth of 5.0% though higher than 2.8% reported during 1Q16.

Manufacturing takes a breather. The manufacturing sector likewise moderated though remaining elevated overall with a 5.9% growth following a stellar 6.6% growth during February. On a MoM basis, the sector rebounded strongly by 11.6% (Feb: -4.3%), typical of seasonal fluctuations observed in March. Post-seasonal adjustment, the manufacturing sector slipped 0.4% (Feb: +2.1%).

Moderating broad-based growth. The manufacturing sector continued to demonstrate broad-based growth for the third consecutive month with all major subsectors reporting an expansion albeit with some plateauing or slowing somewhat. Manufacturing sector growth continues to be underpinned by solid expansion in the E&E subsector which grew 8.5% (Feb: 8.5%), contributing towards 2.4 ppt to manufacturing sector growth. The petroleum, chemical, rubber and plastic product subsector, helped provide an additional push with a 3.6% growth (Feb: 3.7%), translating to a 1.3 ppt contribution to overall manufacturing sector growth. However, growth in the food, beverage and tobacco subsector slowed significantly to 5.7% after a 15.9% expansion in February.

Manufacturing sales expands. In a separate report, manufacturing sector sales continued to see double-digit growth of 13.6% in March (Feb: 15.7%) for the 4th consecutive month since December 2016. In MoM terms, manufacturing sales grew by 10.9% as is typical of March seasonal patterns. After seasonal adjustment, manufacturing sales declined 2.1% MoM (Feb: +6.0%). Sales growth were driven largely by refined petroleum product, electrical capacitor, resistor, circuit board and display, as well as by sales of organic chemical and inorganic compound.

Mild mining sector rebound. Mining sector production was slightly higher at 2.0% (Feb: 0.4%), breaking the two consecutive months of moderating growth. Higher mining production growth was driven by a mixture of slower deterioration in the crude oil index which fell by just 2.6% (Feb: -4.7%) and a slightly faster natural gas index growth of 7.9% (Feb: 7.0%). On a MoM basis, the mining index rebounded by 9.1% (Feb: -9.7%) though after seasonal adjustment, it declined 0.7% (Feb: -0.3%).

Flattish electricity index. Electricity output was largely flattish, deteriorating slightly by -0.2% (Feb: 1.5%). In MoM terms, the electricity index rebounded by 12.4% (Feb: -6.8%). Meanwhile, the seasonally adjusted electricity index declined by 2.7% MoM (Feb: +0.5%).

PMI above threshold. In spite of being slightly slower in March we expect the IPI to be well-poised for a stronger April performance following solid April PMI numbers. Malaysia’s PMI breached the 50.0-point threshold for the first time since March 2015 with a reading of 50.7 points (Mar: 49.5). It was largely in line with the overall optimistic PMI figures observed across the ASEAN countries with only Thailand reporting a mild sub-50 reading of 49.8. This suggests that Malaysia’s growth story is consistent with the regional upturn. Globally, growth remains well-supported with April’s global PMI at 52.8 (Mar: 53.0) while Europe’s and US’ PMI remains strong at 56.7 and 52.8 respectively (Mar: 56.2 and 53.3 respectively).

OUTLOOK

Industrial production growth intact. While IPI saw slightly slower growth of 4.6%, we believe that the drivers for industrial production remain largely stable with the manufacturing sector, in particular, poised for a stronger recovery moving forward. Indeed, despite slower growth, the manufacturing subsectors continue to see broad based growth overall. Furthermore, Malaysia’s April PMI reading, suggests some upside for the manufacturing sector moving into the 2Q17, supported by strong external demand. This coincides with the strong export numbers coming from the external trade datasets which saw March exports expanding 24.1% (Feb: 26.6%). This, along with the generalised recovery in ASEAN and globally, may help support the narrative of a reinvigorated regional production network with spill over benefits for Malaysia, moving forward. However, we retain some caution on sustained manufacturing growth given PMI feedback that output may not necessarily be matched by rising orders but instead, contributing towards heightened inventory levels.

Mining sector likely to remain weak. Despite March’s 2.0% growth in the mining sector, we are somewhat bearish on the mining sector’s prospect given Malaysia’s participation in OPEC’s voluntary oil production cut. While the natural gas index mitigated some impact from the crude oil sub-index, in the absence of long term growth catalyst in the mining sector, we believe that the mining sub-index is likely to be biased on the downside.

Building a growth narrative. Combined, we believe that overall industrial production growth in the 1Q17 remains healthy at 4.3% (4Q16: 5.0%) YoY despite a more moderate March growth numbers. Nevertheless, the 1Q17 manufacturing sector growth performance was indeed better, expanding by 5.6% from 5.0% in 4Q16, suggesting that it could support a higher GDP growth story in the 1Q17. This means that 1Q17 real manufacturing growth could be higher than what we had earlier estimated. Hence, we are revising our 1Q17 real manufacturing growth to 5.1% from 4.7%. Along with the sharp turnaround in the agriculture sector and sustained services sector growth, we are revising our headline 1Q17 GDP growth estimate to 5.0% from our recent adjustment of 4.8% (earlier forecast was 4.4%). However, we retain the recent adjustment we made on our full year 2017 forecast at 4.8% (from 4.5% previously), after taking into account the possibility that that GDP growth could taper off slightly in the 2H17

Source: Kenanga Research - 12 May 2017

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