Baidu (BIDU.US) 2Q results beat, Market Cap topped the industry

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1 Baidu (BIDU.US) 2Q results beat, Market Cap topped the industry Company s report Rating:LT-Buy Price:US$ TP:US$22 Upside: 23% 27 July 211 Summary: Event: Baidu announced 2Q11 results Special views: 1) Top/Bottom lines beat on higher traffic and ARPU 2) Operating margin reached new peak. 3) Box computing will bring potential revenue under better user experience. Share Information (US$) 52w High (HK$) w Low (HK$) 76. Market cap (HK$m) 54,63 No of shares (m) 271 Avg daily vol (m) mth change(%) YTD change(%) d MA d MA day RSI Source: Bloomberg 1-year share price chart 29% 26% 23% 2% 17% 14% 11% 8% 5% 2% BIDU US Equity AHXH Index MXCN Index -1% J- A-1 J-1 S-1 D-1 M-11 M-11 Source: Bloomberg Top/Bottom lines and margins beat market: 1) Gross revenue recorded at RMB3.415bn, up 78% yoy, and 4% qoq, higher than market consensus (3.256bn) and management guidance ( bn), as well as Bocom estimates (3.312bn). Net profit was RMB 1.633bn, up 95% yoy and 52% qoq, (9% higher than market consensus, in line with Bocom). Diluted EPADR(non- GAAP) was RMB4.77, up 94% yoy, and 51% qoq; 2) Gross margin (79.7%), Operating margin (58.4%) and net margin (51.3%) all showed strong performance; 3) Cash and equivalent amounted to RMB9.9bn, an increase of RMB146mn sequentially. Higher traffic and spending by customers drove revenue up: 1) After experiencing weak seasonality in Q1, paying customer accounts continued to grow, up 17% yoy and 9% qoq to 298k; 2) Expense per customer was RMB11.5k, up 52% yoy and 29% qoq; 3) TAC accounted for 7.9% of the total revenue, significantly lower than the 8.2% in 1Q11 and lower than the 9.7% in 2Q1, mainly due to stronger organic traffic growth. 4) Bandwidth cost was up to 4.3% (from 3.5%) of total revenue as higher requirement on facilities. 5) Operating cost were 19.8% of revenue, although personnel and marketing costs increased. Business initiatives updates: 1) Box computing is still in early stage, but potential revenue foreseen with room of development and better user experiences. 2) Social product -Baidu Ting! can solve the music right issues with paying fees to music label companies, but cost are expected to be insignificant (<5% of total cost of revenue). 3) Landing page strategy with partners (ie. CRIC, Qiyi, Qunar etc) to ensure better user experience in order to monetize related vertical traffic more efficiently. 4) Although Qiyi had no much contribution on company revenue at the moment, outlook will be positive base on Qiyi s 16mn monthly unique visitors. Box computing as well as other strategic investments will bring potential sustainable growth in the market (77% in 2Q11). Also, given management s expectation of 75%-8% yoy increase on its total revenue and good operation, we revise up TP to US$22 from US$147 on higher 11/12 EPS (up 15%/5%), 1X PEG, and 46% 3-year CAGR. Maintain LT buy. Risk: 1) Industry growth may slow down. 2) Competition from other search engines as google s market share keep decreasing, ie. Sohu s sogou (1.6%, incorporate with Alibaba), Tencent soso (.7%) etc; as well as in vertical search market, ie Etao. Connie Gu conniegu@bocomgroup.com Tel: (861) Download our reports from Bloomberg:BOCM enter Valuation Baidu (RMB mn) E 211E 212E 213E Revenue yoy% 162% 18% 83% 39% 78% 93% 5% 39% Net profit yoy% 542% 18% 67% 42% 137% 14% 39% 1% EPS (diluted, USD) Gross margin 71% 63% 64% 64% 78% 79% 75% 64% EBIT margin 45% 44% 47% 9% 53% 58% 54% 42% Net margin 36% 36% 33% 33% 48% 5% 47% 37% PE (diluted) Source: Company s data; BOCOM Int l 34.8

2 Chart 1: Summary of 2Q11 results (RMB,mn) FY21 2Q1 1Q11 2Q11 QoQ YoY Bocom Forecast Difference Comments Revenue online marketing service 7,913 1,913 2,435 3,414 4% 78% 3,311-3% Higher traffic and ARPU other services % -39% -87% Total Revenue 7,915 1,914 2,436 3,415 4% 78% 3,311-3% Net Revenue 7,41 1,793 2,277 3,18 4% 77% 3,96-3% Cost of revenues (1,644) (397) (51) (645) 26% 63% (64) -1% Gross profit 5,766 1,396 1,766 2,535 43% 82% 2,456-3% Operating expenses Sales,General and administrative (1,89) (265) (333) (378) 14% 42% (339) -1% more personnel cost and marketing cost Research and Development (718) (159) (239) (299) 25% 88% (227) -24% spend more on development as well as head count. Total operating expenses (1,87) (424) (572) (676) 18% 59% (566) -16% Operating profit (loss) 3, ,195 1,858 56% 91% 1,89 2% Other income (expense) % 876% 36-39% Tax % 13% % Net income 3, ,71 1,632 52% 95% 1,631 % Gross margin 78% 78% 78% 8% 3% 2% 79% % Operating Margin 5% 51% 49% 54% 11% 7% 57% 5% Net margin 45% 44% 44% 48% 9% 9% 49% 3% Basic EPS % 94% % Diluted EPS % 95% % Chart 2: Revenue/Profit recorded high 3,5 3, Net revenue Operating profit (loss) Net income 2,5 2, 1,5 1, 5 1Q72Q73Q74Q71Q82Q83Q84Q81Q92Q93Q94Q91Q12Q13Q14Q11Q112Q11 Note: in RMB terms Download our reports from Bloomberg: BOCM enter Page 2

3 Chart 3: Margins observe the normal seasonal trends 9% 8% 7% 6% 5% 4% 3% 2% 1% % Gross margin (%) Operating margin (%) Net margin (%) Chart 4: TAC decreased due to stronger organic traffic growth 18% 16% 14% 12% 1% 8% 6% 4% 2% % TAC (% of total gross revenue) Note: TAC=(traffic acquisition cost) Chart 5: Number of customers set record high 35, Active online marketing customers 3, 25, 2, 15, 1, 5, Download our reports from Bloomberg: BOCM enter Page 3

4 Chart 6: ARPU reached high record Revenue per customer (gross) 14, 12, 1, 8, 6, 4, 2, Chart 7: Operating cost are 19.8% out of total revenue, first time under 2% 4% 35% operating cost (% of total revenue) operating cost (% of total revenue) 3% 25% 2% 15% 1% 5% % Chart 8: Baidu s market share in search engine market increased Sougou 1.% Others.6% soso.6% 2Q1 Sougou 1.3% Others.6% soso.9% 1Q11 Sougou 1.6% Others.4% soso.7% 2Q11 Google cn 27.2% Google cn 24.3% Google cn 2.1% Baidu 7.6% Baidu 72.9% Baidu 77.2% Source: iresearch Download our reports from Bloomberg: BOCM enter Page 4

5 Chart 9: Income statement Forecast Income Statement (RMB) 1Q21 2Q21 3Q21 4Q21 1Q211E 2Q211E 3Q211E 4Q211E Revenue online marketing service 1,293 1,913 2,256 2,45 2,435 3,414 4,582 4,854 other services Total Revenue 1,294 1,914 2,256 2,451 2,436 3,415 4,583 4,855 Net Revenue 1,213 1,793 2,115 2,29 2,277 3,18 4,268 4,521 Cost of revenues (345) (397) (432) (47) (51) (645) (847) (949) Gross profit 868 1,396 1,682 1,82 1,766 2,535 3,421 3,572 Operating expenses Sales,General and administrative (137) (184) (211) (225) (239) (28) (372) (394) Research and Development (122) (159) (25) (232) (239) (299) (46) (442) Total operating expenses (26) (343) (416) (457) (478) (579) (778) (836) Operating profit (loss) 68 1,53 1,266 1,363 1,288 1,956 2,643 2,736 Other income (expense) Tax (71) (141) (165) (16) (181) (286) (398) (413) Net income ,131 1,249 1,164 1,73 2,38 2,391 Gross margin 71.5% 77.9% 79.6% 79.5% 77.6% 79.7% 8.1% 79.% Operating Margin 43.8% 54.2% 55.9% 55.7% 52.5% 58.4% 59.5% 58.1% Net margin 39.6% 46.7% 49.5% 5.7% 47.% 51.3% 51.7% 5.5% Basic EPS Diluted EPS Diluted EPS (non-gaap)(ex-sbc) Chart 1: Baidu PE Band USD X X X 6 1X 4 2 5X 25/9/19 27/2/1 28/6/15 29/1/28 211/3/12 Source: Company s data, Bloomberg, BOCOM Int l Download our reports from Bloomberg: BOCM enter Page 5

6 BOCOM International 9/F, Man Yee Building, 68 Des Voeux Road Central, Hong Kong. Main: (852) ; Fax: (852) Contacts: (852) (852) (852) (852) (852) (852) (861) Rating System Company Rating Buy: Expect more than 2% upside in 12 months LT Buy: Expect more than 2% upside but longer than 12 months Neutral: Expect low volatility Sell: Expect more than 2% downside in 12 months Sector Rating Outperform: Expect more than 1% upside in 12 months Market perform: Expect low volatility Underperform: Expect more than 1% downside in 12 months Analyst Certification The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report; (iii) no insider information/ non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations were being received by the authors. The authors of this report further confirm that (i) neither they nor their respective associates (as defined in the Code of Conduct issued by the Hong Kong Securities and Futures Commission) have dealt in or traded in the stock(s) covered in this research report within 3 calendar days prior to the date of issue of the report; (ii)) neither they nor their respective associates serve as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective associates have any financial interests in the stock(s) covered in this report. Download our reports from Bloomberg: BOCM enter Page 6

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