Baidu delivered solid 4Q19 results, with topline/bottom line +6%/95% YoY, 2%/4% above consensus. 1Q20E guidance missed on epidemic impact. Epidemic posed short-term pressure on ads demand, especially from SMEs and offline business, but we keep positive on its long-term recovery. We cut our earnings forecast by 6% in FY20E, and trimmed TP to US$151.2. Maintain BUY.
- Solid 4Q19. 4Q19 revenue reached RMB28.9bn (+6% YoY, +3% QoQ), 2% above consensus. Non-GAAP net profit surged 95.5% YoY to RMB9.2bn, 4% above consensus. In light of epidemic impact, 1Q20 guidance came in with revenue growth of -5% to -13% YoY, with midpoint 8.8% below consensus. Excluding iQiyi’s guidance, Baidu Core’s guidance suggests -10% to -18% YoY decline. We think Baidu’s results is better than feared, given its solid traffic and resilient margin, despite short-term pressure from epidemic disruption.
- Baidu Core: epidemic partly priced in, eyes on healthy traffic metrics. Given the epidemic impact, we expect Baidu to bear short-term pressure from ads demand challenges: 1) SMEs’ shrinking ads budget; and 2) offline advertisers (e.g. healthcare, travel, etc.), and ads recovery might potentially be delayed by 3-6 months. We cut its revenue by 4%/2% in FY20/21E, accordingly. However, we believe the epidemic impact has been partly priced in, and we suggest investors to look beyond 1Q20E guidance. We keep positive on its long-term ads recovery, mainly on: 1) strong traffic growth and user engagement: Baidu App DAU +21% YoY in 4Q19; 2) well-executed managed page initiatives; and 3) resilient online advertises (e.g. online games, education, and ecommerce) in CNY.
- Long term margin resilient. 4Q19 Baidu Core’s non-GAAP operating margin came out at 39.1%, above our estimate. Looking ahead, we expect 1Q20E margin to bear pressure, with soft topline but flat QoQ cost+opex. 2020E margin might be partly diluted by content cost, investment in R&D, but effective cost control will continue in the long run. We cut our earnings forecast by 6% in FY20E to reflect epidemic impact, while FY21E earnings remains intact.
- Maintain BUY. We slightly cut our SOTP-based TP from US$156.5 to US$151.2. The stock is trading at 19x/13x FY20/21E P/E, valuation is attractive. We suggest to look beyond 1Q20E financials. Wait for long-term recovery and upside from medical transition and ecosystem monetization.
