The downturn in the domestic Internet cloud business has passed, and AI has driven domestic Internet cloud business and advertising business revenue growth. With the end of the dividend for consumer Internet users and the macroeconomic impact on enterprise IT spending, the growth rate of the domestic public cloud market will slow significantly in 21-23; however, we believe that the competitiveness of domestic Internet companies will improve in the AI cloud era. Computing power (they have increased investment in widely procuring chips, and some companies have the ability to develop their own chips), algorithms (sufficient engineer resources), and data scenarios (strong traffic entry advantage) all have advantages. Currently, all domestic internet companies have launched segmented products such as big models and Wensheng Video. AI applications are progressing relatively fast on the B-side. The C-side core implements recommended scenarios while increasing the “volume” and “price” of advertisements. Among domestic Internet companies, Ali and Baidu have quantified AI's contribution to the cloud business.

Baidu 2024 World Conference focuses on the accelerated implementation of AI applications, and large models and generative AI drive the high growth of intelligent clouds.

Baidu's big model has leading Chinese NLP capabilities. In November '24, Wenxin's average daily call volume exceeded 1.5 billion, an increase of nearly 30 times compared to the 50 million times first disclosed a year ago. The 2024 Baidu World Conference strategically positioned “Applications are here”, and downstream AI applications are blossoming more and more. The conference positioned “smart devices” and industrial applications as the two most important strategic directions, and introduced the achievements of companies, roles, tools, and four types of smart devices in the industry, including multiple ToB and ToC applications. In addition, Baidu focused on releasing: 1) iRAG search enhances Wensheng chart technology; 2) codeless application creation tool “in seconds”; 3) small AI glasses with built-in large models. Generative AI and basic models continue to drive high growth in the intelligent cloud business, and the share of AI revenue in the 1Q24-3Q24 smart cloud gradually increased to 6.9%, 9%, and 11%, respectively.

Smart driving multi-business layout: 1) Radish Run: Policies are frequent in many regions, and smart driving services have been implemented one after another. Currently, 100% driverless services are provided throughout Wuhan. UE is expected to gradually improve as bicycle costs and personnel costs decrease.

2) Smart Driving Solution: Apollo ADFM, the world's first large model supporting L4 autonomous driving, was released in May '24.

3) Smart cars: Joining hands with Geely to build vehicles, the sales volume of the two models Jiekue 001 and 007 increased month-on-month.

Core online marketing revenue is affected by the macro environment+online advertising competition, and the traffic market is relatively stable. Macro factors influence advertisers' intention to launch, and the growth rate of the advertising industry has generally slowed down. Advertisers' budgets are gradually shifting to media that focus on high conversion rates or occupy high-frequency life scenarios of users, and search ads are under relative pressure. On the user side, Baidu's traffic market is still stable. It has the Baidu App, the leading domestic search+information streaming application, as well as more than 10 apps such as Google+ and Tieba. The MAU of the 3Q24 Baidu App has maintained steady growth over the past 22 years. The MAU of the 3Q24 Baidu App reached 0.704 billion.

Give it an “gain” rating. Baidu Group's overall revenue for 2024-2026 is expected to be 133.9/140.6/148.9 billion yuan, respectively, with corresponding growth rates of -1%/5%/6%, respectively. Under the SOTP valuation method, the Group's overall target valuation is 234.8 billion yuan, which corresponds to the target price of Hong Kong stocks at HK$90 per share, and corresponds to an upward margin of 12%, giving it an “increase in holdings” rating.

Risk warning: Competition in the advertising industry increases risks, changes in the macro environment affect the demand of enterprises to go to the cloud, domestic cloud factory competition intensifies, innovation business uncertainty and regulatory risks.