Baidu delivered eye-catching 3Q19 results, with margin surprise from disciplined cost control. We expect its cost efficiency to continue in FY20E, and ads sentiment stabilized. We raised our earnings forecast by 40%/ 6% in FY19/20E, and lifted TP to US$156.5. Maintain BUY.
- 3Q19 strong beat. 3Q19 revenue reached RMB28.1bn (-0.4% YoY, +7% QoQ), 2% above consensus. Non-GAAP net profit declined 35% YoY to RMB4.4bn, 56% above consensus, mainly on lighter TAC, and disciplined S&M expenses. 4Q19 guidance came in with revenue growth of -1% to +6% YoY, with midpoint in line with consensus. Excluding iQiyi’s 4Q19 guidance, Baidu Core’s guidance was higher than expectation. We view Baidu’s results as impressive, given its solid topline with margin surprise, despite ongoing macro uncertainty and rising ads inventory.
- Baidu Core: healthy traffic metrics with enhanced ecosystem. 3Q19 Baidu core search revenue grew 8% QoQ (-9% YoY), with solid traffic metrics (Baidu App DAU +25% YoY) and user engagement. Mgmt stated that online marketing overall stabilized, in which ads performed well in education, retail and ecommerce sectors. We turned more positive on Baidu’s topline outlook, mainly on: 1) Healthcare transition execution well, 2) evolving ecosystem strengthened with mini program, videos and managed page strategies; and 3) ads sentiment stabilization with healthy traffic metrics. 1Q20E might see weak seasonality, but 4Q19E and FY20E outlook seems better than market expectation. We expect its Baidu Core to deliver 9% YoY rev growth in FY20E, backed with on ROI-driven strategy and incremental monetization potential from enriched features.
- Better margin outlook with continuous cost efficiency. 3Q19 Non-GAAP operating margin came out at 13%, largely higher than our estimate. Looking ahead, mgmt. guide cost control (from S&M and TAC sides) to continue in 2H19E and FY20E. Given its solid 3Q19 results and upbeat net profit, we raise our earnings forecast by 40%/ 6% in FY19/20E.
- Maintain BUY. We lift our SOTP-based TP from US$147.6 to US$156.5. The stock is trading at 21x/18x FY19/20E P/E, valuation is attractive. We think Baidu’s tough time was over, and expecting more upside potential from medical transition and mobile ecosystem monetization. Maintain BUY.
