To The Moon

$Baidu(BIDU)$

Bai now?

Baidu’s 1QFY22 scorecard came in above expectations. Revenue grew 1% year-on-year (YoY) to CNY28.4b, which was 2% above street. Non-GAAP net income fell 10% YoY to CNY3.9b, which was significantly above consensus at CNY1.8b – i attribute this mainly to solid expense control especially in SG&A. Management noted that Covid-19 has negatively impacted the business since mid-Mar, specifically its ad business and delayed the implementation of some cloud projects. Given the macroeconomic uncertainties, management will be increasingly disciplined with spending and investment, which i believe will be supportive towards 2QFY22 Baidu core operating profit margin (OPM). While Baidu AI Cloud is still loss-making at the operational level, management shared that it strives to standardise products and solutions after gaining sufficient experience in specific industries to further scale the business. Separately on Intelligent Driving, management noted that its total projected cumulative sales of auto solutions rose from ~CNY8b (4QFY21) to more than CNY10b (1QFY22). In my view, headwinds for 2QFY22 are well understood by the market, and i believe management is likely to be able to demonstrate judicious cost control, as it did in 1QFY22. Should macro conditions improve in 2HFY22, i expect Baidu to likewise benefit from it. I believe the near-term headwinds from lockdowns are unlikely to impact Baidu’s ability to progress in its Cloud efforts over the longer term, as well as its AI driving business. Still, given macro uncertainties, i believe it would be prudent to incorporate more conservative assumptions.

DYODD.