Baidu, Inc., a former Chinese Internet search giant, has long fallen out of the first echelon of the Internet, and now the name of "BAT" has been replaced by "ATM"-BABA, Tencent and Meituan.

In terms of market capitalization, Baidu, Inc. ranks fifth among Chinese Internet companies by market capitalization, after Meituan and JD.com.

In terms of ups and downs, Baidu, Inc. ranked last with a 20 per cent decline in 2019. If this trend continues, Baidu, Inc. 's market capitalization ranking is likely to decline further.

There are two reasons why Baidu, Inc. 's share price is so weak:

First, the general environment is weak and the overall growth of the advertising industry is slowing down.

China Mobile Limited Internet advertising market capacity growth decline, growth pressure, as a barometer of the Internet economy, fully reflects the commercial value of the advertising market.

Second, structural factors, although the overall weakness, but the trend of the Internet advertising industry in 2019 is that e-commerce, social networking, video and other advertising markets eat into the search advertising market, and search advertising is squeezed.

The competition from Toutiao, Douyin, Kuaishou Technology and so on is becoming more and more fierce, and advertisers have more and more channels to choose from, while advertisers generally tend to invest resources in new traffic because of its better conversion effect. in addition, the mobile Internet occupies the king of the mountain, the problem of information isolated island has always existed, leading to the decline of the search market.

So, the question is: will Baidu, Inc. stay behind until it becomes insignificant?

My view is that there will be a short-term recovery, higher valuation, long-term competitiveness remains to be seen, and its short-term investment value, specifically, has the following points:

First, return to Hong Kong for a second listing to raise the valuation

On November 26th, BABA officially listed for the second time on the Hong Kong Stock Exchange at an offering price of HK $176a share, an increase of 6.25% on its first day of listing. As of January 14, 2020, BABA's Hong Kong shares have risen 27%, with a total market capitalization of HK $4.8 trillion, making it the king of Hong Kong stocks by market capitalization.

BABA's U. S. stocks also continued to rise, with BABA's U. S. stocks up 21% since November 26.

Earlier, a number of media reported that Baidu, Inc. planned to return to Hong Kong for a second listing and had contacted some large institutions in Hong Kong. Insiders revealed that Baidu, Inc. has been planning to return to Hong Kong for some time, and the progress may be faster than Trip.com and others.

As domestic investors have a better understanding of Chinese Internet companies than foreign investors, especially after entering Hong Kong Stock Connect, they will have the investment demand for southward funds, so under the leadership of BABA's secondary listing, other overseas high-quality assets will also obtain the demand for high allocation of domestic funds after the secondary listing, and raise their own valuations.

Second, profits rebounded

Baidu, Inc. 2019Q3 financial results show that Q3 operating profit of 2.4 billion yuan, Non-GAAP belongs to the company's net profit of 4.4 billion yuan, both exceeded Bloomberg consensus expectations-its profit rebound trend is continuing.

The main reason is that the better control of flow costs and sales management expenses led the company to reduce its adjusted net profit by 34.4% to 4.39 billion yuan compared with the same period last year, which was 56.2% higher than market expectations, and the adjusted net profit rate was 15.6%, an increase of 1.8% compared with the previous month. Profit margins have rebounded for two consecutive quarters.

Looking forward to 2020, it is believed that Baidu, Inc. 's cost rate will be further controlled, driving the rebound of Baidu, Inc. 's profits, and may continue to release profit data that exceed market expectations.

III. Value revaluation

As we all know, search business is the cornerstone of Baidu, Inc.. As long as the foundation of search is not shaken, the value of Baidu, Inc. remains. Although Jinri Toutiao wants to do search business, it has not yet had an impact on Baidu, Inc.. Other search engines currently seem to pose no threat to Baidu, Inc..

In terms of ranking, the overall Chinese search engine in 2019 has not changed much compared with 2018: Baidu, Inc. is still absolutely dominant, with a slight increase in market share of 1.1 per cent. Sogou search market share is relatively stable, nearly a year is maintained at about 14%.

Let's take a look at the valuation of its divisions:

1. Baidu, Inc. 's core business

Under the influence of the general environment, the growth rate of Baidu, Inc. 's online marketing business has declined one after another this year, with Q2 and Q3 falling by nearly-10 per cent.

But in terms of user data, 19Q3 Baidu, Inc. APP's DAU grew 25% year-on-year to 189 million, with a net increase of 1 million quarter-on-quarter. According to QuestMobile, Baidu, Inc. APP's MAU reached 460 million in September 2019, a net increase of about 7 million over June. In addition, Baidu, Inc. Mini Program still maintained high growth, Q3 Mini Program MAU reached 290 million, a month-on-month net increase of 20 million, user penetration still has room to improve.

It can be seen that Baidu, Inc. 's traffic is still growing, and it is expected that the search business may recover later.

In 2018, Baidu, Inc. achieved revenue of 78.27 billion, Non Gaap net profit of 28.47 billion and net interest rate of 36.4%. Assuming no revenue growth this year, the net profit margin dropped significantly to 24%, and the core business net profit is expected to be 18.7 billion in 2019. The valuation is based on 18-year static PE12 times, and the search business is valued at $32 billion.

2 、 iQIYI, Inc.

Baidu, Inc. currently holds 56.67% of iQIYI, Inc. 's shares, iQIYI, Inc. currently has a market capitalization of 17.4 billion US dollars, and Baidu, Inc. holds some corresponding market capitalization of 9.86 billion US dollars.

3 、 Trip.com

Baidu, Inc. currently holds 11.75% of Trip.com, Trip.com currently has a market capitalization of US $22.2 billion, and Baidu, Inc. holds a portion corresponding to a market capitalization of US $2.61 billion.

Cash and equivalents

As of 2019Q3, excluding iQIYI, Inc. 's cash, Baidu, Inc. 's cash and equivalents reached 123.5 billion yuan, corresponding to 17.64 billion US dollars.

The above segments can be summed up, Baidu, Inc. 's theoretical market capitalization should be US $62.1 billion, compared with the current market capitalization of US $50 billion, there is still 24% room to rise (the valuation of Baidu, Inc. 's AI and self-driving business is not taken into account here, it can be regarded as an option in the future).

Conclusion

Rome wasn't built in a day.

Baidu, Inc., who wants to go public again, is obviously not satisfied with his valuation, and in the short term, there is indeed room for rise.But in the long run, Baidu, Inc. must solve some fundamental problems, such as the weakening of search business caused by the isolated island of information.

Li Yanhong said that more and more App no longer rely on search engines, applications are becoming isolated islands, large App has become independent of each other, and its content services cannot be obtained by search engines and so on. In recent years, giants such as BABA, Tencent, JD.com and other giants have deeply laid out the field of information flow. Baidu, Inc. is becoming more and more difficult, and ordinary people's demand for search engines is getting weaker and weaker, but Baidu, Inc. 's foundation and source of traffic is still search.

Of course, if we take a closer look at Baidu, Inc. 's ecology, we will find that Baidu, Inc. actually lacks the ability of ecological evolution. Baidu, Inc. always focused on the search track, but did not grasp the expansion of the recommendation of the emerging information flow, but was snatched by Jinri Toutiao. Byte Jump used the information flow model to make a giant connecting people and content. On the other hand, BABA and Tencent have been enriching their wings over the years, and nothing can shake their position.

So, is Baidu, Inc. a "value opportunity" or a "value trap"?

At present, it is difficult to judge. Maybe Baidu, Inc. will shine again in the AI era, but in the short term, Baidu, Inc. is cheap enough to fall to this point. If he does return to Hong Kong for a second listing, it will be quite good to have a wave of revaluation opportunities.