Baidu delivered solid 3Q20 results, with revenue/adj. EPS +0.5% YoY/+61% YoY, 3%/51% above consensus. 4Q20 rev guidance beat 3%. Baidu has entered into an agreement with JOYY to acquire “YY Live” at US$3.6bn in cash. We keep positive on its ads recovery, backed by strong feeds & video penetration, increasing contribution with managed page initiatives. Moreover, its AI monetization and YY synergy would bring further upside if executed well. We slightly lifted its earnings by 3%/2%/0% in FY20/21/22E, with higher SOTP-based TP of US$173 (on higher Baidu Core earnings and investment valuation).
- 3Q20 beat. 3Q20 revenue was RMB28.2bn, +0.5% YoY, 3% above consensus. Non-GAAP EPS grew 61% YoY, 51% above consensus. Margin surprised on higher gross margin (optimized TAC) and disciplined cost control. 4Q20E guidance came in at RMB28.6-31.3bn, -1% to +8% YoY, with midpoint 3% above consensus.
- Ads gradual recovery trends well. 3Q20 Baidu Core +2% YoY (vs. -3% in 2Q20), 2% above our expectation. Baidu App DAU reached 206mn, +1% QoQ. Excluding iQiyi’s rev guidance of -3% to +3% YoY, Baidu Core will grow at -1% to +10% YoY in 4Q20E, 3% midpoint above our estimate. We believe this solid guidance was mainly attributable to ads sentiment recovery, increasing contribution with managed page initiatives, and improved targeting.
- Acquiring YY Live to bring synergy and diversify revenue. Baidu would acquire YY Live (JOYY's domestic live streaming business, including YY mobile app, YY.com website, and PC YY) for a purchase price of US$3.6bn in cash. The closing of the transaction is subject to certain conditions and is currently expected to occur in 1H21. The valuation is estimated to be 11x FY21E P/E for YY Live (38% above our prior valuation of US2.6bn, 8x FY21E P/E). Mgmt expects YY live to bring synergy, in which YY Live could benefit from Baidu's large traffic and thriving mobile ecosystem, while Baidu will receive immediate operational experience for social media development and creator network.
- Maintain BUY. To reflect better ads outlook and margin trend, we slightly lifted its earnings by 3%/2%/0% in FY20/21/22E, with higher TP of US$173 (18x FY21E P/E) from US$151. The stock is trading at 15x FY21E P/E, not demanding in our view. We expect solid ads sentiment in next few quarters, and AI initiatives to unlock long-term potential.
