Key points of investment

Performance outlook: We expect the company's 2024Q2 revenue to be 33.9 billion yuan, the same year on year; Baidu's core revenue is 26.4 billion yuan, which is the same as the previous year. We expect the company's adjusted operating profit to be 7.2 billion yuan, of which Baidu Core's adjusted operating profit is 6.4 billion yuan, and the adjusted operating profit margin is 24.2%. We expect the company's adjusted net profit to reach 7.7 billion yuan.

Q2 The advertising business continues to be under pressure, affecting Baidu's core business revenue growth rate. We expect Baidu's core revenue to be 26.4 billion yuan in 24Q2, the same as the previous year. Among them, advertising revenue is affected by macroeconomics and is expected to drop 4% year over year. Mainly due to weak advertising demand from customers in the automotive, real estate and other industries. At the same time, user-side AI search transformation also has an impact on traditional ad clicks. We are optimistic that the proportion of search content generated by the company's AI will increase further, but the negative impact on advertising commercialization may continue in the short term. In the cloud computing business, we expect revenue of 5.2 billion yuan in Q2, an increase of 14% year over year, with AI continuing to increase its share. The non-cloud and non-advertising business is exploring development directions in the short term, and we expect overall stability.

The AI business is progressing steadily, and we expect a further increase in the revenue contribution of generative AI in Q2. In June, Wenxin's cumulative number of users reached 0.3 billion (surpassed 0.2 billion in April), and the number of daily calls exceeded 0.5 billion. The company continues to improve the underlying ecosystem of AI tools, such as releasing Propeller Framework 3.0, which has core technologies such as unified automatic parallelism of motion and static, automatic optimization of compilers, multi-hardware adaptation of large models, and integrated training and promotion of large models. The Propeller Wenxin ecosystem has gathered 14.65 million developers, served 0.37 million enterprises and institutions, and created 0.95 million models. Baidu's continued promotion of AI model-related businesses is expected to drive growth in related revenue contributions.

It is recommended to pay attention to the progress of the intelligent driving business. In May, Baidu unveiled the sixth-generation Radish Express driverless car on Apollo Day 2024, achieving 10 times the safety of human drivers and coverage of complex city-level scenarios. The company continues to make breakthroughs in autonomous driving models. According to the profit model, according to Apollo Day 2024, with the completion of the construction of a fully automated unmanned vehicle operation network, Baidu's unmanned vehicle operating costs were reduced by 30%, and service costs were reduced by 80% through the use of advanced cloud cabin systems and continuous optimization of autonomous driving technology and human cabin efficiency. Wuhan is a key operating city for the company's intelligent driving business. The company has launched more than 400 driverless cars. In March, it officially expanded autonomous driving service hours in parts of Wuhan, providing 7*24 hours of uninterrupted service. The company aims to achieve balance of income and expenditure in Wuhan by the end of 2024, and fully enter a profit period in 2025. We recommend keeping an eye on future developments in this business.

Profit forecast and investment rating: We continue to be optimistic about the long-term development of the company's AI business. The autonomous driving business is worth paying attention to in the medium to long term, but considering that the advertising business is still under pressure, we lowered the company's 2024-2026 revenue forecast from 139.3/148.2/155.7 billion yuan to 136.2/145.3/152.8 billion yuan, and adjusted net profit from 30.9/32.7/35.1 billion yuan to 29.8/31.8/34.1 billion yuan Corresponding to 2024 PE was 8 times higher, maintaining the “buy” rating.

Risk warning: the economy falls short of expectations, competitive risks, technological development falls short of expectations