Baidu's core revenue is predicted to drop 2% year on year in 3Q, and Baidu's core operating profit margin will remain flat in 3Q24. We expect Baidu's overall revenue to drop 4% year on year to 33.1 billion yuan; of these, Baidu's core revenue will drop 2% year over year to 26.1 billion yuan. We expect 3Q24 non-GM net profit of 5.8 billion yuan, of which Baidu's core non-GM net profit is 5.5 billion yuan.

Key points of interest

AI and autonomous driving are progressing at a pace. At the Baidu Yunzhi Conference in '24, the company announced new developments in the three major directions of computing power, models, and AI applications, and upgraded the three major AI native application products: code assistants, intelligent customer service, and digital people. Limited by chip procurement, the company expects AI-related CapEx growth to be pressured during the year, but the industry's demand for large models will continue, or drive continued growth in API calls. The company expects to continue to enrich the model matrix to meet the diverse needs of the B-side, and will seek balance between revenue growth and cost reduction and efficiency. On the autonomous driving side, the 2Q results conference announced that the low-cost RT6 has begun large-scale testing, and the company expects to move towards single-zone UE break-even at a pace.

Ad revenue is expected to be under pressure in 3Q24, and AI Cloud will maintain double-digit growth. 1) Advertising: Considering the return of pressure on offline advertisers and the negative impact of AI search transformation on commercialization, we maintain the 3Q Baidu core advertising growth forecast of 5% year-on-year; the company firmly promotes AI search transformation and the “integration of search and promotion” strategy, and the proportion of AI content continues to increase (generated AI search results accounted for 18% in August and 11% in mid-May), and AI functions continue to be iterated. The company is expected to disclose more user side assessment indicators and results details in the 3Q performance, but we think the company is still exploring AI commercialization models in the short term. Support may be relatively limited; 2) Cloud: Considering the short-term pressure on the revenue side of individual cloud business organizational restructuring, we expect Baidu Cloud's revenue to increase 13% year-on-year in 3Q due to steady double-digit cloud growth in the industry.

We expect Baidu's core operating profit margin to remain flat in 3Q24. After this round of executive changes, the company is expected to maintain the previous strategy of reducing costs and increasing efficiency as a whole, so we maintain the judgment that the 3Q Baidu Core adjusted operating profit margin was basically flat at 25% year-on-year. However, considering that exchange gains and losses have increased, it may have a negative impact on Baidu's core adjusted net profit.

Profit forecasting and valuation

Considering the revenue pressure caused by changes in the organizational structure, we have basically maintained our 24-year revenue forecast, lowered our 25-year revenue forecast by 1% to $136.7 billion, and lowered our non-generic standard net profit forecast by 2% and 4% to $265 and $28.3 billion for 24 and 25 years, maintaining outperforming industry ratings. Considering the increase in foreign investment value, which offsets the valuation impact of the reduction in profit forecasts, we maintain the target prices of US stocks and Hong Kong stocks of HK$116 and HK$112 based on the SOTP valuation method, respectively It corresponds to the 2024/2025 non-standard price-earnings ratio of 11 times/10 times that of Hong Kong stocks. Compared with the current US stocks and Hong Kong stocks, there is 26.6% and 23.4% upside, respectively (current US stocks correspond to 9 times/8 times the 24/25 non-standard price-earnings ratio, and Hong Kong stocks correspond to 9 times/8 times the 24/25 non-standard price-earnings ratio).

risks

New business expansion fell short of expectations, cost reduction and efficiency fell short of expectations, and regulatory risks.