Baidu 24Q3 performance outlook: We expect Baidu 24Q3's total revenue to be 33.6 billion yuan, -2.5% year over year; non-GAAP net profit of 6.2 billion yuan, or -14% year over year.

Baidu Core: We expect Baidu Core's revenue in 24Q3 to be 26.3 billion yuan, -1.2% year over year; of which online marketing revenue is 18.7 billion yuan, -5% year over year; non-online marketing revenue is 7.5 billion yuan, +10% year over year; and iQiyi's revenue is 7.6 billion yuan, or -5% year over year. We believe that the company fell short of expectations due to macroeconomic consumption recovery in 24, and the advertising business will continue to be under pressure until Q4. Next year there may be an inflection point. The application of the big language model is progressing steadily, and it is expected to drive Baidu's cloud business to continue to grow.

Gross profit & profit: We expect 24Q3 non-GAAP operating profit of 6.4 billion yuan and an operating margin of 19.1%.

Smart Cloud & Wenxin: We expect Baidu's AI cloud business revenue to reach 5 billion yuan, achieving 14% year-on-year growth. As of November 2024, Wenxin's user base reached 0.43 billion, and the number of daily calls reached 1.5 billion. In terms of the development trend of AI applications, the company released four categories of agents: companies, roles, tools, and industries. The Wenxin Smart Platform's TOP100 smart devices include not only characters such as peasant academician smart devices, but also smart devices for various scenarios such as tools, industries, workplaces, emotions, and entertainment. Currently, the Wenxin Smart Platform has attracted 0.15 million companies and 800,000 developers.

Baidu's no-code tool “Second Click” released at the World Conference has three major features: codeless programming, multi-agent collaboration, and multi-tool calls, and can build a complete system using natural language. Baidu also developed iRAG (image based RAG), a Wensheng map technology with enhanced retrieval. Combining Baidu's billion-level image resources with powerful basic model capabilities, it can generate all kinds of ultra-realistic images.

The Wenxin Big Model and the Propeller Deep Learning Platform have been jointly optimized and continuously innovated, improving model effectiveness, training efficiency and inference performance, and supporting the wide application of the Wenxin Big Model. Propeller Wenxin has 18.08 million developers, served 0.43 million companies, and created 1.01 million models.

We believe that the company actively promotes the application of big models in different scenarios and fully exploits the potential of big language models. It has now formed an intelligent platform, started and continues to take the next step, and the company will continue to advance on the long-term path of AI in the future.

AI glasses: At Baidu 2024 World Conference, Xiaodu Technology released a new AI hardware: Xiaodu AI glasses. In terms of visual imaging and recognition effects, the Xiaodu AI glasses are equipped with a 16 million pixel ultra-wide-angle camera and a self-developed AI anti-shake algorithm. Second, the Xiaodu AI glasses combine a four-array microphone with a customized open leakproof speaker unit, which can capture sound more accurately and three-dimensionally, identify the direction of the sound source, distinguish the wearer from others, and accurately achieve character separation and recognition. The Xiaodu AI glasses are designed with a low power consumption circuit architecture, which can achieve 56 hours of standby, support continuous listening for more than 5 hours, and can be quickly fully charged in 30 minutes, so that the “personal assistant” can be on duty at any time. More importantly, the weight of Xiaodu AI glasses is only 45g, which is almost no different from wearing ordinary glasses, so you can wear them easily and freely even for a long time. We believe that with the application of large model capabilities, AI applications can be implemented in many scenarios such as pension, health, entertainment, and education in the future.

Investment recommendations: Based on advertising recovery or falling short of expectations, we expect FY2024-2026 to generate revenue of 135/148.9/165.6 billion yuan; non-GAAP operating profit of 26.4/31.1/34.5 billion yuan.

Based on SOTP estimates, Baidu's 2024 advertising, cloud business, and iQiyi's non-advertising revenue was maintained as a “buy” rating of 8x P/E, 3x P/S, and 14x PE, corresponding to a target price of HK$137.

Risk warning: 1. Increased competition in the domestic cloud market; 2. Internet regulatory risks; 3. Recurrent risk of the epidemic; 4. Macroeconomic slowdown; 5. Smart driving business falls short of expectations