Bocom intl published a report stating that baidu (09888.HK) reported third-quarter revenue of 33.6 billion yuan, a decrease of 3% year-on-year, which is basically in line with the bank's and market expectations. Adjusted net profit was 5.9 billion yuan, corresponding to a net profit margin of 18%, which is 5% lower than the bank's and market expectations. Marketing and management expenses increased by 2% year-on-year, higher than the bank's forecast of 4%, due to increased channel expenditure and promotion costs.

The report indicates that baidu's advertising revenue is expected to continue being impacted by the transformation of AI search-generated results squeezing traditional search advertising slots. Policies positively impacting offline consumer spending may manifest next year, and therefore fourth-quarter advertising revenue growth is expected to remain under pressure, resulting in a potential year-on-year decline in adjusted operating profit margin. AI Cloud is projected to grow by 13% in the fourth quarter, accelerating quarter-on-quarter, with healthy profit margin contributions partially alleviating the profit pressure from the decline in advertising revenue.

The bank expects to see the commercialization of AI search and related intelligent entities next year, projecting baidu's advertising revenue to remain flat compared to this year. Based on a ten times PE ratio for next year, the target price is lowered to 105 HKD, while the current price corresponds to a 7.6 times PE ratio for next year, which remains at the valuation bottom range, maintaining a 'buy' rating.