Summary. Baidu delivered solid 2Q19 results, with margin surprise from disciplined cost control, similar to most internet peers. We expect its effective cost control to continue in 2H19E. With multiple ad headwinds partly priced in, Baidu’s valuation at 25x/16x FY19/20E P/E looks attractive. We keep our TP of US$147.6 unchanged.
- 2Q19 beat on margin. 2Q19 revenue reached RMB26.3bn (+1.4% YoY, +9% QoQ), 2% above consensus. Non-GAAP net profit declined 51% YoY to RMB3,635mn, 78% above consensus, mainly on lighter content cost, and disciplined expense control. 3Q19 guidance came in with revenue growth of -5% to +1% YoY (or -1% to +5% YoY excluding divestures), with midpoint in line with consensus. iQiyi’s 3Q19 guidance missed 5%, while Baidu Core’s guidance was higher than expectation. We view Baidu’s results as solid, given macro uncertainty, rising ads inventory and tightening regulations.
- Baidu Core: growth not bad despite multiple headwinds around. 2Q19 Baidu core revenue grew 3% YoY (ex-divested businesses), and beat on other revenue. 2Q19 guidance midpoint implied -1% YoY growth for Baidu core, which was above already-low market expectation. Ads still experienced softness in top sectors, including healthcare, games, financial services, and auto/logistics sectors. Healthcare ads declined by double-digit percentage in 2Q19, as stated by mgmt. Mgmt. expects wide usage of its mini program to enhance precise recommendation and user engagement, thus improving ads ROI.
- Effective cost control to continue. 2Q19 adj. net margin reached 14% (vs. 4% in 1Q19, 29% in 2Q18). We are impressed by its disciplined cost control, vs. previous guidance on continuous investment in content cost and short video. Looking ahead, mgmt. guides cost control to continue in 2H19E, with COGS & OPEX in 3Q19 close to 2Q19. Given its solid 2Q19 results and guidance, we slightly raised our earnings forecast by 1%/ 1% in FY19/20E.
- Maintain The stock is trading at 25x/16x FY19/20E P/E, valuation is attractive. Multiple ads headwinds have been partly priced in. Wait for its organic transition and ads long-term recovery. We keep our SOTP-based TP of US$148 unchanged. Maintain BUY.
