3Q revenue is basically in line with market expectations

The company announced 3Q24 results: the company's revenue decreased by 3% year on year to 33.6 billion yuan, which is basically in line with market expectations; Baidu's core revenue decreased by 0.2% to 26.5 billion yuan, which is basically in line with market expectations; Baidu's core non-general standard operating margin remained flat at 25% year on year, in line with our expectations; non-common standard net profit of 5.9 billion yuan (non-common standard net profit margin 18%), which is 5% lower than market expectations. This is a net increase in exchange losses due to fluctuations in the RMB exchange rate against the US dollar.

Development trends

AI continues to transform the mobile ecosystem, boosting user-side data, but short-term revenue pressure remains. Baidu's core advertising revenue also fell 4% in 3Q, due to pressure on offline advertising recovery and the negative impact of AI transformation on commercialization. 3Q continues to increase the penetration of generative AI results in the mobile ecosystem: 1) Baidu apps account for 20% of generative AI search results (2Q is 18%), causing 70% of monthly active user interaction and longer user time. 2) The smart strategy continues to advance, and ERNIE Agent's average daily interaction cycle reached 15 million, attracting 0.02 million advertisers in September. 3) Baidu Library's MAU using AI functions also reached 50 million (an increase of more than 3 times), driving a steady 23% increase in library subscription revenue. Considering that AI monetization is under pressure in the short term, we expect 4Q advertising revenue to drop 7% year over year. Considering the increase in demand for generative AI computing power costs and the increase in the share of low-profit margin businesses, we expect Baidu's core operating profit margin to be under pressure year over year.

Cloud revenue continues to grow in double digits, and profit margins continue to be optimized. 3Q AI cloud revenue also increased 11%, and profit margins were optimized, mainly supported by AI-related revenue and GPU cloud cross-selling. AI contributed 11% to cloud revenue (up about 2ppt from month to month). 3Q continues to improve the efficiency of model fine-tuning and training, and has launched the no-code tool “Click in seconds”. Since November, the average number of API calls for the Wenxin series model has reached 1.5 billion per day (0.6 billion in August), and the average number of tokens per day has reached 1.7 percent (2Q is 1 call), with external calls increasing by 240% at the end of September. Considering the increase in AI cloud contributions and the steady growth of traditional clouds, we expect 4Q cloud revenue growth to accelerate to 12%, and AI cloud profit margins are expected to continue to be optimized. The company plans to launch a new generation of basic models in early 2025.

Radish Express expands the scope of operations while standardizing operational efficiency. The number of orders for the 3Q Radish Express also increased by 20% to 0.988 million. In October, fully driverless orders accounted for 80% of the country's total order volume (3Q was 70%), and RT6 is already operating on open roads in many cities across the country. The company expects to continue improving operational efficiency while exploring geographical expansion.

Profit forecasting and valuation

Considering the pressure on advertising revenue, we lowered our 2024 and 2025 revenue forecasts by 1% and 2% to 1321 and 134.5 billion yuan, and 5% and 6% of non-GM net profit for 2024 and 2025 to $252 and 26.6 billion. Maintain an outperforming industry rating and maintain the target prices of US stocks and Hong Kong stocks at HK$116.0 and HK$112.3. Based on the SOTP valuation method (net cash growth and advertising business valuation reduction), the 2024/2025 non-standard price-earnings ratio of both US stocks and Hong Kong stocks is 11 times/11 times. Compared with current US stocks and Hong Kong stocks, there is 34% and 34% upward space, respectively (current US stocks correspond to 9 times/8 times 2024/2025 non-generic price-earnings ratio for 2024/2025. price-earnings ratio).

risks

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