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Author: kimeng   |   Latest post: Thu, 19 Sep 2019, 10:23 AM

 

Baidu Inc: On a diet

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  • Keeping costs on a tight leash
  • Headwinds remain
  • FV of US$113

Results beat

Baidu Inc’s (Baidu) 2Q19 results came in above expectations. Revenue rose 1% YoY to RMB 26.3b (+6% YoY excluding revenues from divested businesses, which were consummated in 2018), or 2% above consensus. Other revenue rose 44% YoY to RMB 7.1b, driven largely by growth in iQIYI membership services, cloud as well as smart devices.

Baidu’s core marketing services experienced softness in various sectors, including healthcare, online games, financial services and auto/logistics. Gross margin of 38.8% was below the street’s expectation of 41.8%, largely on the back of a 87% increase in other cost of revenues, due mainly to higher cost of goods sold for smart home devices and higher depreciation expense.

Non GAAP operating profit fell 70% YoY, which was better than the street’s expectations due to a more modest SG&A increase, which we believe to be down to better cost control. All in, non-GAAP PATMI came in at RMB 3.6b, or 78% above consensus.

Cost control moving forward

Management remains upbeat on Baidu’s Smart Mini Program ecosystem, which they believe will generate significant ROI for customers, in part from the avoidance of channel costs associated with building separate apps. Management was sanguine about new entrants entering the search market.

In Baidu’s opinion, search has a high barrier, with search users on Baidu’s platform having specific needs, which is different from consumers on feed platforms – comments which we believe are targeted towards Bytedance’s Jinri Toutiao. Management expects cost of revenue and opex to remain stable QoQ, which points to continued cost control against a backdrop of subdued revenue growth.

FV of US$113

The midpoint of 3Q19 revenue guidance of RMB 27.7b is roughly in-line with consensus. While management noted limited revenue visibility for 4Q19, especially with the volatile macro situation, it was mentioned that the minimal sequential growth across 3Q18 to 4Q18 could be used as a reference. As such, the current consensus of 2.7% QoQ growth expected in 4Q19 could still be revised downwards.

We continue to believe that the headwinds from the group’s health care initiative, macro uncertainties and softness from iQIYI’s advertising contribution could cap the upside on Baidu’s share price, following the post-results relief rally. We derive a FV of US$113, based on our SOTP approach.

Source: OCBC Research - 21 Aug 2019

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