Baidu 24Q3 performance overview: The company's total revenue in Q3 was 33.6 billion yuan, -3% YoY: Non-GAAP net profit of 5.9 billion yuan, -19% YoY.

Baidu Core: 24Q3 Baidu Core's revenue was 26.5 billion yuan; of this, online marketing revenue was 18.8 billion yuan, -4% year-on-year: mainly due to the severe macroeconomic situation, consumer confidence and spending are still sluggish.

We expect online marketing revenue growth to remain largely steady over the next few quarters.

Non-online marketing revenue was 7.7 billion yuan, +12% year over year, mainly driven by smart cloud business; AI Cloud revenue reached 4.9 billion yuan, +11% year over year. The growth was mainly driven by generative AI (Gen-AI) and basic models. AI revenue accounted for 11% of total AI Cloud revenue; iQiyi's revenue was 7.2 billion yuan, -10% year-on-year.

We believe that the company's strong technical advantages in AI infrastructure will continue to drive AI CLOUD revenue growth. As ERNIE's adoption continues to expand, it continues to make significant progress in the field of basic models, and is expected to maintain its lead in the AI CLOUD field.

Smart Cloud & Wenxin in a word: The company expanded the ERNIE series and launched two enhanced lightweight models, SpeedPro and Lite Pro. ERNIE processed around 1.5 billion API calls per day in November, a significant increase from 0.6 billion in August. We believe ERNIE's market adoption trend is good as API calls increase, and we are gradually verifying its value in actual applications. Supported by an enhanced ERNIE model, the company is fully penetrating AI capabilities across the entire product line, from consumer-facing products to enterprise solutions. According to the company announcement, the company will continue to enhance the functions of ERNIE Agent in the future and expand its application in various scenarios. ERNIE Agent's number of conversations increased significantly, reaching an average of 15 million per day. Monthly active users in September were 0.704 billion, +6% YoY. In terms of search share, the proportion of search results pages containing generated content has risen from 18% to 20%, and the Baidu App AI function covers nearly 70% of its monthly active users. AI Cloud continued to accelerate in the third quarter, and business growth effectively offset the continued weakness of the online marketing business. We believe that the company's continued investment in AI will further expand Baidu's business capabilities.

Profit side: 2024Q3 non-GAAP operating profit of 7 billion yuan, operating margin of 26%. We believe that Baidu Search's user behavior continues to improve, and operating profit margins are expected to continue to improve.

Intelligent driving: According to the company's annual report, the company's autonomous driving service Radish Express supplied about 0.988 million orders in 24Q3, which is +20% compared to the same period last year. As of October 28, 2024, Radish Express has provided more than 8 million self-driving travel services to the public. On the basis that Radish Express has completed a total of 8 million travel services, the sixth-generation unmanned vehicle Apollo RT6 mass production cost is extremely competitive. The price is less than 0.03 million US dollars, and the company is making steady progress in developing driverless cars.

Investment advice: We believe that the company's online marketing business is in a transition period. Combined with the current advertising industry situation, the company will continue to promote AI transformation and continue to invest in the continuous development of AI smart cloud business and driverless cars. We adjusted our FY2024-2026 revenue forecast from 135/148.9/165.6 billion yuan to 133.8/147.6/164.1 billion yuan, and non-GAAP operating profit from 280/311/345 to 27.4/30.8/34.2 billion yuan. Based on SOTP estimates, Baidu maintained a “buy” rating for 2024 advertising, cloud business, and iQiyi's non-advertising revenue at 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. Risk of repeated epidemics; 4. Macroeconomic slowdown