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Baidu (BIDU US) Company Update Summary

Core Content

This report provides an update on Baidu's financial performance and outlook for the fourth quarter of 2021 (4Q21E) and the first quarter of 2022 (1Q22E), along with its long-term (LT) potential and valuation.

Main Points

3Q21 Performance

• Revenue: RMB31.9bn (+13% YoY), in line with consensus.
• Non-GAAP EPS: RMB53.2, down 28% YoY but 20% above consensus.
• Margin Beat: Gross margin increased, contributing to better-than-expected profitability.
• 4Q21E Guidance: Revenue expected to grow between 2-12% YoY, with a midpoint 0.7% below consensus.
• Baidu Core Revenue: Expected to grow 5-16% YoY in 4Q21E, excluding online marketing.

Ad Revenue Headwinds

• Continuation of Pressure: Ad revenue is expected to remain flat in 4Q21E due to weak macroeconomic conditions, ongoing impact of the pandemic, and tightening regulations.
• Non-Ad Growth: Strong momentum in non-ad services, with AI Cloud revenue accelerating to +73% YoY.

Investment Outlook

• AI Cloud Potential: Positive outlook for AI Cloud business, supported by expansion in smart transportation and other AI applications.
• 4Q21E Growth Slowdown: Expected slowdown in AI Cloud growth due to high base effect.

Earnings and Valuation Adjustments

• Earnings Trim: Earnings trimmed by 11-18% for FY21-23E due to ad headwinds and margin dilution from non-ad investments.
• Target Price: Revised to US$218.8 from US$248.0, reflecting the updated outlook.
• Price Performance: Current price at US$161.8, with a 35.2% upside to the target price.

Financial Metrics

• Revenue Mix: Online marketing dominates revenue, accounting for 72.7% in FY21E.
• Gross Margin: Improved to 46.6% in 3Q21, up from 47.7% in FY21E.
• Operating Margin: 7.6% in 3Q21, down from 9.7% in FY21E.
• Net Margin: 14.9% in 3Q21, down from 16.6% in FY21E.
• ROE: Expected to rise to 10.1% in FY23E.

Key Information

Earnings Summary

Valuation

• SOTP-Based Target Price: US$218.8 (down from US$248.0).
• Valuation Components:
  • Core search + news feed: US$106.1 per share (EV/EBIT).
  • Cloud: US$25.7 per share (EV/Sales).
  • Apollo: US$16.6 per share (EV/Sales).
  • iQiyi: Market cap valuation.
  • Ctrip: Market cap valuation.
  • Net Cash: US$54.6 per share.

Shareholding Structure

Price Performance

Conclusion

• Investment Rating: Maintain BUY, with a 35.2% upside to the revised target price.
• Risks and Catalysts: Multiple downside risks are limited, but lack of near-term catalysts is noted.
• Long-Term Outlook: Positive on AI Cloud's long-term potential, despite short-term headwinds in advertising revenue.

Related Reports

• China Internet: Embracing a new normal of regulation (8 Nov 2021)
• Prudent ads outlook in 2H21E (13 Aug 2021)
• Stepping-up Auto & AI investment ahead (20 May 2021)

Auditor

• Ernst & Young

Analyst Certification

• The analyst certifies that the views expressed accurately reflect personal opinions and confirms no conflicts of interest related to the covered stocks.

CMBIS Ratings

• BUY: Potential return of over 15% over next 12 months.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark over next 12 months.

Disclosures

• CMBIS does not provide individually tailored investment advice.
• Information is not guaranteed and may be subject to change.
• This report is for the use of intended recipients only and may not be reproduced or distributed without consent.

Legal and Distribution Notes

• United Kingdom: Report is provided only to persons within Article 19(5) of the Financial Services and Markets Act 2000.
• United States: Report is intended for distribution solely to major US institutional investors.
• Singapore: Distributed by CMBI (Singapore) Pte. Limited, an Exempt Financial Adviser, and regulated by the Monetary Authority of Singapore.