Baidu delivered strong 1Q20 results, with topline/bottom line -7%/+219% YoY, 3%/113% above consensus. 2Q20E guidance beat 2%. We are impressed by its effective cost control, and turn more positive on Baidu ads recovery for its strong traffic and well-executed managed page initiatives. We keep our financial forecast unchanged. Maintain BUY with TP US$151.2.
- 1Q20 beat on margin surprise. 1Q20 revenue was RMB22.5bn, down 7% YoY, 3% above consensus/ at high-end of guidance, mainly on better-than-expected Baidu Core. Non-GAAP EPS surged 219% YoY, 113% above consensus. Margin surprised on higher-than-expected gross margin (lower TAC) and lighter R&D. 2Q20E revenue guidance came at RMB25-27.3bn, -5% YoY to +4% YoY, with midpoint 2% above consensus. Excluding iQiqi’s guidance, Baidu Core was guided at -8% YoY to +2% YoY. We view 1Q20 as a strong quarter, for its effective cost control and solid guidance in 2Q20E.
- Ads recovery on track. 1Q20 Baidu Core declined 13% YoY, better than our expectation. Baidu App DAU +28% YoY in 1Q20 (vs. +21% YoY in 4Q19), with in-app search queries +45% YoY and feed time spent +51% YoY. Given weak hospital ads demand, healthcare revenue contribution was below 10% YoY in 1Q20, and medical ads monetization was pending for full re-opening. Mgmt mentioned that eCPM would continue to improve after domestic market stabilization, suggesting positive signal for ads sentiment. We turn more positive on its ads recovery, mainly on: 1) strong traffic and user engagement; 2) well-executed managed page initiatives; and 3) resilient online advertises (e.g. online games, education), coupled with recovery from offline advertisers.
- Disciplined cost control to continue. 1Q20 Baidu Core’s non-GAAP operating margin came in at 22%, above our estimate of 16%. Looking ahead, mgmt guided cost+opex up 10% or teens QoQ in 2Q20E. In the long run, mgmt. expect potential margin expansion with higher productivity, effective cost control and narrowing loss of AI initiatives.
- Maintain BUY. We keep our financial forecast unchanged, with SOTP-based TP of US$151.2 (16x FY21E P/E). The stock is trading at 18x/13x FY20/21E P/E, valuation is attractive in our view. Backed by solid results and guidance, we suggest to watch its ads recovery and upside from medical transition and ecosystem monetization.
