UBS IB has just raised Baidu’s PT to $315, based on solid 4Q20 earnings estimates. Baidu also has a pipeline of new businesses, including its recently announced JV with Geely on autonomous vehicles. Baidu is a major laggard amongst China internet giants with its PER trailing at a ~20% discount while forward PE remains at the low end of peers,. Baidu’s application for a secondary listing in Hong Kong also acts as a near term catalyst, as secondary listings historically lead to a run-up in prices (e.g. Alibaba, JD.com, Netease etc.).

Performance since inception*

Baidu is a leading Chinese-language internet search provider. It serves three types of online participants: 1) users; 2) online marketing customers; and 3) Baidu Union members. It generates most of its revenue from online marketing services (about 70%).

We turn more positive on Baidu as we see progress on the two catalysts that drove our previous upgrade. First, we believe that online advertising is on track for a recovery in 2021. Secondly, management have continued to take action to realize sum of the parts value, and investors are increasingly open to valuing Baidu this way based on our recent conversations. Therefore, we changed our valuation methodology from DCF to SOTP in our base case and increase our PT to US$315 with an upside case of $400.

We believe the key risks for Baidu include: 1) an evolving and intensifying competitive landscape; 2) execution of new businesses; 3) integration of invested companies and businesses; 4) rising cost of traffic acquisitions, content and brand promotions; 5) maintaining and upgrading IT systems; 6) infringement of intellectual property rights; 7) expansion into international markets; 8) key management departures; and 9) regulatory risks.

* Total return including dividend yield. For an ADD idea: positive performance if price went up. For a REDUCE idea: positive performance if price went down.
Source: UBS. Prices correct as of latest data available on the date indicated. Company Profile, Investment Case and Risks in Investment Case as of 18 Jan 2021