Baidu delivered mixed 2Q20 results, with topline/bottom line -1%/+46% YoY, 1%/57% above consensus. 3Q20E revenue? guidance missed 1% on weak iQiyi. Stock price might see short term pressure for iQiyi's SEC investigation and 3Q20 uncertainty. But we are positive on Baidu Core’s long-term recovery, coupled with further catalysts (e.g. potential listing of subsidies). We cut our topline estimates by 7%/10%/9%, but raised earnings forecast by 21%/2%/3% in FY20/21/22E for better cost control. Maintain BUY with unchanged TP of US$151.
- 2Q20 beat, while 3Q20 guidance soft on iQiyi. 2Q20 revenue was RMB26.0bn, dropped 1% YoY, 1% above consensus. Non-GAAP EPS grew 46% YoY, 57% above consensus. Margin surprised on higher gross margin (optimized TAC), narrowing iQiyi loss and disciplined cost control. 3Q20E guidance came in at RMB26.3-28.7bn, -6% YoY to +2% YoY, with midpoint 1% below consensus. 3Q20 guidance is soft on iQiyi's weak guidance (10% below consensus), while Baidu Core is in-line.
- Prudent on short-term ads recovery. 2Q20 Baidu Core declined 3% YoY (vs. -13% in 1Q20), in line with our expectation. Baidu App DAU reached 204mn, -8% QoQ, with traffic normalization after epidemic. Mgmt guided Baidu Core's rev at -7%~+3% YoY in 3Q20E, largely in line, backed by increasing contribution with managed page initiatives and improved targeting (higher eCPM). However, iQiyi's weak guidance reflects slower-than-expected ads recovery, for soft brand ads demand amid macro uncertainty.
- Disciplined cost control to continue. 2Q20 Baidu Core’s non-GAAP operating margin came in at 34% (vs. 22% in 2Q20), above our estimate of 28%, for stringent cost saving. In the long run, mgmt. expected potential margin expansion with higher productivity, effective cost control and narrowing loss of AI initiatives.
- Maintain BUY. To reflect iQiyi’s slower recovery, we cut our topline estimates by 7%/10%/9%, but raised earnings forecast by 21%/2%/3% in FY20/21/22E for better cost control. Given little change on FY21E earnings, our SOTP-based TP is maintained at US$151 (16x FY21E P/E). The stock is trading at 13x FY21E P/E, and valuation is not demanding in our view.
