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Non-GAAP earnings rose 16% YoY, beating consensus by 7%, thanks to improved OP margin from business line optimisation and well- controlled SG&A expenses. Management indicates ads revenue and AI cloud growth aligned with Covid situation and macro conditions.
Reiterate BUY with trimmed target price from US$185 to US$181, equivalent to HK$177 for H-share.
Key Factors for Rating
3Q22 revenue increased by 2% YoY to RMB32.5bn, beating market consensus by 2.4%, despite Covid lockdowns in August and September. Online marketing service revenue reached RMB19.9bn, down 5% YoY mainly due to the regional lockdowns hindering offline advertisements such as travel and franchising verticals and weak macro economy curbing advertisers’ budgets. Non-marketing revenue from Baidu core increased by 16% YoY, mainly driven by 24% YoY growth of AI cloud revenue to RMB4.5bn, well ahead of industry average level.
Non-GAAP net income increased by 16% YoY to RMB5.9bn, beating consensus by 7%, representing a net margin of 18.1%, up by 2ppts YoY. We attribute this mainly to business line optimisations such as realigning the cloud business and focusing on cloud business with higher margin within Baidu core and content cost reductions by iQIYI, coupled with well controlled SG&A expenses (declined 32% YoY). Mobile ecosystem provides the stable cash flow continuously for investments of AI and intelligent driving. Management also indicated to continue the efforts to narrow the loss in AI cloud.
Margin improvement despite revenue slowdown: 1) AI Cloud revenue growth slowed down to 24% YoY (vs 45% YoY in 1Q22 and 31% in 2Q22), mainly impacted by COVID restrictions impeding the bidding for new contracts and deployment of existing projects. 2) Adjusted operating profit margin increased by 7ppts YoY to 22%, among which, Baidu core’s adjusted OPM was up 3ppts YoY and iQIYI’s adjusted OPM turned positive.
Earning revisions: we revised up our FY22-24E revenues by 0.6%/0.5%/0.5% and adjusted up FY22-24E non-GAAP earnings by 7.1%, 1.0% and 1.1% respectively, mainly including 3Q22 non-GAAP earnings which is better than our previous estimate.
We reiterate BUY, and revised down our target price from US$185.00 to US$181 based on SOTP valuation methodology with updated forecast and applying 10x PE for FY22/23 ad business and 5x P/S (vs previous 7x) for FY22/23 Cloud business.
Key Risks for Rating
Macroeconomic slowdown; stricter regulatory environment; intensified industry competition; higher-than-expected R&D costs; risks associated with the landing of AI-related projects; higher-than-expected traffic acquisition costs and margin drag from iQiyi.