Introduction to this report:
Revenue growth is steady, and AI brings revenue growth to advertising and the cloud. The revenue contributed by AI is expected to increase by several billion yuan in 2024. The gradual construction of the AI ecosystem will unlock huge profit potential.
Summary:
Profit forecast and investment advice: We continue to be optimistic about the company's long-term development and subsequent growth in performance.
We expect Baidu's FY2024E/FY2025E/FY2026E revenue to be 1435/1, 569/171.5 billion yuan (RMB, same below), up 7%/9% year on year, and adjusted net profit of 331/383/43.2 billion yuan respectively, up 15%/16%/13% year on year. We gave a target price of HKD 115, maintaining the “Overweight” rating.
Revenue growth is steady, and AI cloud profitability continues to improve. 2023Q4 Baidu achieved revenue of 35 billion yuan, a year-on-year increase of 6%, which is basically in line with Bloomberg's agreed expectations. By business, Baidu's core revenue increased 7% year over year to 275 billion yuan, and online marketing revenue in the mobile ecosystem business increased 8% year over year. The growth in internet marketing was mainly driven by AI cloud business. The monthly active users of Baidu App in December increased 3% year over year to 667 million; the intelligent driving technology layout progressed steadily, and Radish Fast Run orders increased 49% year over year to 839,000 orders, providing more than 5 million orders. iQiyi's revenue increased 2% year over year. AI cloud revenue increased 11% year over year to 5.7 billion yuan, and profitability continued to improve. Among them, generative AI applications and basic models contributed 4.8% of AI cloud revenue. Net profit continued to grow at a high rate. The company's gross margin increased by 1.4 pcts year on year, sales and management expenses decreased by 1.0 pcts year on year, and R&D expenses increased 11% year on year, mainly due to increased server depreciation and hosting fees in support of Wenxin's statement. Operating profit margin increased by 1.5 pcts, and adjusted net profit increased 51% year over year to 8.1 billion yuan, corresponding net profit margin of 23%.
AI brings revenue growth to advertising and the cloud, and Wenxin is gradually building an ecosystem. Q4 ERNIE and ERNIE Bot brought in hundreds of millions of dollars in revenue growth. Looking ahead to 2024, this revenue increase is expected to reach several billion yuan, mainly from advertising and AI cloud businesses. In terms of AI cloud, by the end of 2023, Baidu's propeller platform had gathered 10.7 million developers, and developers had created 860,000 models on flying paddles. In terms of AI applications, it is expected that in the future there will be millions of native AI applications based on Wenxin, mainly developed by cloud customers, and the gradual construction of the AI ecosystem will unleash huge profit potential.
Catalysts: The restoration of the advertising market exceeded expectations, the performance of large models was upgraded, and the autonomous driving policy was implemented.
Risk warning: competition risk in main business; risk that consumption recovery falls short of expectations.