bocom intl released a report, indicating that it expects Baidu-SW (09888.HK)(BIDU.US) to see a 0.8% year-on-year decline in core revenue in the third quarter, compared to the previous downward revision of 2.6%, mainly due to advertising business growth pressure. It is expected that Baidu (including iqiyi) will experience a 3% year-on-year decline in revenue, with an adjusted net profit margin of 19%.

The report suggests that Baidu's core business revenue continued to face further pressure in the last quarter. In terms of advertising, the bank forecasts a 4.4% year-on-year decrease in revenue, lower than the previous adjustment of 3.6%, mainly due to some industries' advertisers still showing relatively weak demand, and the monetization of user AI search transformation has not yet begun on a large scale. In the cloud sector, the bank maintains its expectation of double-digit growth, lower than the previous adjustment of 2%, due to the impact of organizational structure adjustments in the cloud storage business. In terms of profit, the bank basically maintains the forecast of adjusted operating profit margin at 24.8%.

bocom intl expects a 2% year-on-year decline in Baidu's advertising revenue in 2024 (previously expected to remain basically flat), while maintaining the judgment of double-digit full-year growth in cloud business, expecting the optimization of operational leverage to bring stable profit margins for core business.

The bank has adjusted its valuation method to price-to-earnings (PE) valuation, considering short-term pressure on search advertising revenue. Based on next year's forecasted PE ratio of 10 times, the target prices for U.S. stocks and H shares have been lowered to $111 and HK$108 respectively, corresponding to a forecasted PE ratio of 11 times in 2024. The current price is equivalent to a PE ratio of 8.9 times in 2024, at a historical low level, recommending attention to product breakthroughs brought about by AI search transformation, and maintaining a 'buy' rating.