Deutsche Bank Markets Research

Rating Company Date 23 January 2017 Hold Alert Company Update Asia China Reuters Bloomberg Exchange Ticker Price at 20 Jan 2017 (USD) 173.44 Technology BIDU.OQ BIDU US NMS BIDU Price target - 12mth (USD) 194.00 Software & Services 52-week range (USD) 196.03 - 140.68

NASDAQ 100 5,063

4Q preview: there's change afoot. We Alan Hellawell expect a beat, but... Research Analyst (+852 ) 2203 6240 Recent management changes may expedite O2O disposal; likely strong 4Q [email protected] We expect Baidu’s recent change in management, among other things, to serve to expedite a solution to the company’s waning to presence in O2O. The Stock data exiting of executives who were behind the original O2O idea, the appointment Market cap (USDm) 60,623 of well respected Microsoft veteran Qi Lu and the return of founder Robin Li’s wife, Ma Dongmin (as Mr. Li’s special assistant), all lead us to believe the Market cap (USDm) 60,623 company has redoubled its efforts to find a buyer for at least its food-delivery Shares outstanding (m) 346.4 business. Baidu, meanwhile, seems to continue to be managing aggressively Major shareholders Robin Li (15.9%) key costs such as O2O subsidies. We expect a potentially strong 4Q bottom Free float (%) 53 line and possibly imminent O2O solution to serve as positive catalysts short Avg daily value traded 118.9 term, although our concerns over lack of new catalysts post-disposal lead us to (USDm) reiterate our 12-month price target. We expect 4Q rev of RMB18.6bn; non- Source: Deutsche Bank

GAAP operating income of RMB3.3bn; and non-GAAP net income of RMB3bn. The company may struggle to meet our aggressive bottom line, but should Key data beat consensus. We expect 1Q guide to reveal continued negative YoY growth FYE 12/31 2015A 2016E 2017E in core search. Sales (CNYm) 66,382 70,941 85,913 Net Profit 35,051.3 11,670.2 15,779.4 Potential for newsfeed advertising, and the competition that it is fending off (CNYm) Baidu is pressing forward with newsfeed ads development. We expect this to DB EPS (CNY) 100.05 33.59 45.36 become a new area for earnings as Baidu has a large advertiser pool (524,000 PER (x) 12.0 35.6 26.4 last Q) and mobile users (660m MAU). We expect some SME advertisers to Yield (net) (%) 0.0 0.0 0.0 shift part of their budget away from search given the reduced number of Source: Deutsche Bank sponsored links in the results page, and toward newsfeed ads as an alternative means of keeping their budget on Baidu. We see newsfeed ads currently delivering RMB4b in revs this year (RMB10b in 2018) as fill rates begin to approach market leader Toutiao’s 1 out of 5-6, but see the other edge of the sword too: the rise of rival P4P products from Toutiao, Weibo, Tencent, etc. Debate over the direction of video in 2017 iQiyi seems to stand apart from competitors Youku and Tencent video in its pursuit of an improved margin this year. iQiyi presented at our 2017 dbAccess China internet tour on Jan 12th. The company expects the mid-low tier of video content pricing to remain stable in 2017, while head content pricing will likely surge further. iQiyi’s subscriber base meanwhile keeps growing. The platform had 20m total subscribers at June-end 2016, and we estimate it finished 2016 with 30m subs. A meaningful improvement in margins, and successful planned IPO (as profiled in ) would likely be well received by investors. We maintain our Hold on Baidu on the indeterminacy of such events and longer term questions over growth.

______Deutsche Bank AG/Hong Kong Distributed on: 22/01/2017 23:30:47 GMT The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Deutsche Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=BIDU.OQ MCI (P) 057/04/2016.