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People walk near a Baidu logo at the company headquarters in Beijing, China April 23, 2021. REUTERS/Florence Lo

Baidu – AI Cloud and Smart Transport

(9888 HK/BIDU US)

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AI Cloud driving growth. Baidu’s cloud business is taking over as its main growth engine as competition and a maturing market slow growth in its search and feed advertising business. In 2021, Baidu’s non-advertising revenues surge 71%, led by its AI cloud business. Baidu is ranked the No. 1 AI cloud provider, according to IDC.

 The leading platform for autonomous driving in China. Baidu’s strong brand and market leadership in autonomous driving has carried over to intelligent driving. Its Apollo brand is well-recognized among automakers. It has partnered with over 30 automakers, including those for Ford, Toyota, Great Wall, and BYD to power their passenger vehicles. Leveraging on Baidu’s cloud offerings, 35 cities in China have adopted Baidu’s ACE (Autonomous Driving, Connected Road, Efficient Mobility) smart transportation engine – a solution aiming to improve municipal traffic conditions, air pollution, and road safety. We believe synergy with Baidu’s ACE engine is a key differentiator for Apollo.

Robotaxis – the future of transport? Last year, Baidu and Geely announced an EV JV (55% Baidu, 45% Geely). Jidu Auto, to develop and manufacture new energy vehicles. Jidu would start mass production of its first "robot" EVs in 2023, it would make EVs that are of the autonomous Level-four, which needs no human intervention.

Valuation. Baidu is valued on a SOTP basis. We conservatively value Baidu at US$143, comprising a 10x 2022F net earnings multiple on Baidu Core (search/feed + AI cloud) on blended 10% earnings CAGR, net cash of US$15b, assigning no value to its other businesses such as Apollo, investments in iQiyi, We believe the risk-reward for Baidu is attractive and the potential upside could be significant as clarity emerges on the viability and profitability of its EV growth initiative. Current market prices imply an upside of over 50% to the consensus target price

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