UNITED STATES Baidu BIDU US Outperform Making progress on AI Price (at 20:50, 18 Oct 2017 GMT) US$270.32

Valuation US$ 305.00 Conclusion - Sum of Parts 12-month target US$ 305.00 . Baidu will report 3Q17 results on October 27 (HKT). We expect strong 12-month TSR % +12.8 revenue and earnings growth of 29% and 119% YoY, respectively. Looking GICS sector Software & ahead, deconsolidation of the O2O business should help lift margins from Services 4Q17 onwards. We believe Baidu’s AI strategy is on track and it aims to start Market cap US$m 95,014 mass producing self-driving buses in 2018. We reiterate Baidu as our top pick 30-day avg turnover US$m 551.2 in the China internet space and are maintaining our TP of US$305. Our Number shares on issue m 351.5 SOTP-based valuation includes 1) US$231 per share for Baidu’s core search Investment fundamentals business, based on a 18x FY18e PE; 2) US$18 per share for iQiyi based on Year end 31 Dec 2016A 2017E 2018E 2019E 2x FY18e EV/sales; 3) the rest (Didi, Eleme, Ctrip, cash, etc.) at US$56 per Revenue bn 70.5 85.3 102.4 116.6 share. We have not included AI into our valuation but the current encouraging EBIT bn 10.0 16.2 21.6 28.8 Reported profit bn 11.6 15.5 20.8 26.3 progress provides upside to our current valuation. Adjusted profit bn 13.4 18.6 24.3 30.2 Gross cashflow bn 21.7 25.7 31.6 30.2 Impact CFPS Rmb 62.50 73.62 90.31 86.01 CFPS growth % 15.0 17.8 22.7 -4.8 PGCFPS x 28.5 24.2 19.7 20.7 . 3Q17 bottom line supported by rejuvenated core business. We expect EPS adj Rmb 38.52 53.37 69.52 86.00 Baidu to report strong revenue growth of 29% YoY to Rmb23.5bn in 3Q, in- EPS adj growth % 2.4 38.6 30.3 23.7 PER adj x 46.3 33.4 25.6 20.7 line with consensus. We expect 3Q17 non-GAAP EPS to soar 119% YoY to Total DPS Rmb 0.00 0.00 0.00 0.00 Rmb14.16 per share, 7.5% ahead of consensus, driven by a recovery in Total div yield % 0.0 0.0 0.0 0.0 ROA % 7.2 9.4 10.5 12.5 search and strong news feed monetization. We expect the core search ROE % 14.7 17.6 19.5 20.2 business (including news feed) to grow 21% YoY in 3Q17, accelerating from EV/EBITDA x 28.9 23.0 18.7 18.9 Net debt/equity % -50.8 -76.8 -80.7 -83.3 11% YoY in 2Q17, due to a higher click-through rate on the search engine. P/BV x 6.3 5.4 4.6 3.9 . Deconsolidate food delivery in 4Q17. Looking into 4Q17, Baidu will BIDU US vs S&P 500, & rec history deconsolidate food delivery and book an investment gain. We reduce our 4Q17 revenue forecast by 2.9% on the spin-off. In 1H17, the margin drag from the food delivery business was 1-2ppts. We estimate the spinoff to save Rmb200-400m opex per quarter for Baidu. Net net, we increase our 4Q17E adjusted non-GAAP EPS by 2.6%. We expected non-GAAP OP margin to recover from 18% in 2016 to 24% in 2017, 26% in 2018 and 30% in 2019. . The first mass-produced AI product will come as early as 2018. On Sept 21, Baidu released Apollo 1.5 only two months after the launch of Apollo 1.0. Baidu has partnered with King Long to develop a mass-produced autonomous Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. bus in 2018. It has also teamed up with BAIC for self-driving vehicles and Source: FactSet, Macquarie Research, October 2017 targets to produce vehicles with L3 and L4 autonomous features by 2019 and (all figures in Rmb unless noted, TP in USD) 2021, respectively. For DuerOS, Baidu and TCL co-released DuerOS-enabled

smart TV in September. In our view, the improving visibility for AI products DuerOS and Apollo will bring in revenue contribution from 2019 onwards and provide upside to its long-term valuation. Earnings and target price revision Analyst(s) Wendy Huang, CFA . We raise our FY17E non-GAAP EPS by 0.8% to reflect margin recovery after +852 3922 3378 [email protected] deconsolidation of the O2O business and keep FY18/19 earnings unchanged. Frank Chen +852 3922 1433 [email protected] Marcus Yang Price catalyst +86 21 24129087 [email protected] Ivy Luo . 12-month price target: US$305.00 based on a Sum of Parts methodology. +852 3922 1507 [email protected] . Catalyst: News feed monetization, AI product commercialization. 19 October 2017 Macquarie Capital Limited Action and recommendation

. Reiterate Baidu as our top pick in the internet space.

Please refer to page 9 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Macquarie Research Baidu

3Q17 results preview . Solid top line and bottom-line growth supported by rejuvenated core business. We estimate Baidu’s 3Q17 revenues at Rmb23,543m, up 29.0% YoY, in-line with the street and in the middle of management’s guided growth range of Rmb23,130-23,750m. We expect non-GAAP EPS to soar 119% YoY to Rmb14.16 per share (vs. 91% YoY growth in 2Q), 7.5% ahead of consensus, driven by a recovery in search and strong news feed monetization. . Dial-in detail. Baidu's management will hold an earnings conference call at 8:00 PM on October 26, 2017, U.S. Eastern Time (8:00 AM on October 27, 2017, Beijing/Hong Kong Time). Call-in numbers: 4006208038 (China), +1 8456750437 (US), +852 30186771 (HK), +44 2036214779 (UK); Passcode: 98359218.

Fig 1 3Q17 result preview 3Q17 Rmb mn 3Q16 2Q17 3Q17E YoY QoQ Consensus vs consensus Guidance

Revenue 18,253 20,874 23,543 29.0% 12.8% 23,456 0.4% RMB 23.13 to 23.75bn Gross profit 9,025 10,340 11,612 28.7% 12.3% Gross margin (%) 49.4% 49.5% 49.3% (12 bps) (21 bps) 47.5% 179 bps S&M -3,479 -2,698 -2,825 -18.8% 4.7% R&D -2,341 -2,636 -2,973 27.0% 12.8% Operating profit 2,787 4,210 4,998 79.3% 18.7% 4,134 20.9% Operating profit margin (%) 15.3% 20.2% 21.2% 596 bps 106 bps 17.6% 360 bps Non-gaap operating profit 3,205 5,006 5,814 81.4% 16.1% Non-gaap operating margin (%) 17.6% 24.0% 24.7% 713 bps 71 bps Net profit 3,102 4,415 4,321 39.3% -2.1% 3,768 14.7% Non-gaap net profit 2,248 4,568 4,937 119.6% 8.1% 4,440 11.2% Non-gaap EPADS 6.47 13.12 14.16 119.0% 8.0% 13.17 7.5% Operating metrics No. of advertisers ('000) 524 470 484 -7.6% 3.0% ARPU per quarter (RMB) 31,470 38,049 42,146 33.9% 10.8% Source: Company data, Bloomberg, Macquarie Research, October 2017

Solid progress on AI strategy . After the announcement of the spinoff of the cash-burning O2O business in August, we believe Baidu will fully focus on AI and we see that is has made meaningful progress on its AI strategy recently, especially in the autonomous vehicle space. . Mass-produce self-driving bus in 2018. Baidu cooperated with King Long Automotive, a Chinese bus manufacturer, to jointly develop driverless bus. Baidu aims to start trial operations in July 2018 and targets to mass produce autonomous bus on a small scale in 2018. . Launch vehicles with L3 features by 2019. In partnership with BAIC group, a Chinese automaker and Baidu Apollo, the project’s major partner, Baidu plans to produce vehicles with Level 3 autonomous features by 2019 and move on to fully self-driving Level 4 cars by 2021. The two also estimate that by 2019, more than 1 million of BAIC’s vehicles carry Baidu’s Apollo. . Released Apollo 1.5. Baidu unveiled Apollo 1.5, the latest generation of its autonomous driving platform only two months after the launch of Apollo 1.0 in July. Baidu’s Apollo project now has over 70 partners up from 50 in July. In addition, Baidu also launched Rmb10bn “Apollo Fund” to invest 100 self-driving projects in the next three years. . For DuerOS and intelligent voice-controlled products, Baidu and FIIL introduced smart headphone based on DuerOS in Sept. In addition, Baidu and TCL co-released DuerOS-enabled smart TV recently while Baidu partnered with Haier and Midea on smart voice-controlled refrigerator supported by DuerOS. . We have not included AI into our valuation. However, the improving visibility and encouraging progress on AI products DuerOS and Apollo will bring in revenue contribution from 2019 onwards and provide upside to its long-term valuation, in our view.

19 October 2017 2 Macquarie Research Baidu

Traffic checks . iQiqyi leads China’s mobile video market. iQiyi’s mobile user traffic is on par with Tencent Video since Aug 2016 and surpasses YoukuTudou by a wide margin. According to Questmobile, iQiyi mobile MAU was 440m slightly higher than 439m on Tencent video in Sept 2017. Total mobile user time spent on iQiyi was 2.9bn hours vs. 3.2bn hours on Tencent Video and 1.4bn on YoukuTudou. We attribute the QoQ drop in MAU and total time spent to the seasonality effect after the summer holiday. . Solid MAU growth on mobile apps. According to Questmobile, both Baidu search app and Baidu Maps have achieved solid MAU growth other the past three years. Baidu’s MAU increased to 414m in Sept-2017 from 225m back in Nov-2014; and Baidu Map’s MAU reached 326m in Jul- 2017 from 171m in Jan-2015. . Recovery on PC search. According to iResearch data, Baidu’s total PC search queries growth turned positive since June 2017 after successive declines for 14 months. Baidu’s PC MAU and DAU stayed mostly flat at c.480m and c.115m, respectively.

Fig 2 Mobile video MAU Fig 3 Mobile video time spent

(mn) (mn hr) 500.0 4,100.0 450.0 3,600.0 400.0 3,100.0 350.0 2,600.0 300.0 2,100.0 250.0 1,600.0 200.0 1,100.0 150.0 600.0

100.0 100.0

Jul-15 Jul-16 Jul-17

Jan-15 Jan-16 Jan-17

Jul-15 Jul-16 Jul-17

Mar-15 Mar-16 Mar-17

Nov-14 Nov-15 Nov-16

Sep-15 Sep-16 Sep-17

May-15 May-16 May-17

Jan-15 Jan-16 Jan-17

Mar-15 Mar-16 Mar-17

Nov-14 Nov-15 Nov-16

Sep-15 Sep-16 Sep-17

May-15 May-16 May-17

iQIYI Tencent Video YoukuTudou iQIYI Tencent Video YoukuTudou

Source: Questmobile, Macquarie Research, October 2017 Source: Questmobile, Macquarie Research, October 2017

Fig 4 Baidu MAU Fig 5 Baidu Map MAU

Baidu MAU (million) Baidu Map MAU (million) 450 414 400

400 350 326

350 300 300 250 250

200 171 200 225

150 150

100 100

Source: Questmobile, Macquarie Research, October 2017 Source: Questmobile, Macquarie Research, October 2017

19 October 2017 3 Macquarie Research Baidu

Fig 6 Baidu PC search queries (Jan/15 – Aug/17) Fig 7 Baidu PC search, DAU vs MAU(Jan/15 – Aug/17)

(mn) 25000.0 50% 600.0 40% 500.0 20000.0 30% 20% 400.0 15000.0 10% 300.0 0% 10000.0 -10% 200.0

5000.0 -20% 100.0 -30%

0.0 -40% 0.0

Jul/15 Jul/17 Jul/16

Jan/15 Jan/16 Jan/17

Mar/15 Mar/16 Mar/17

Sep/16 Sep/15 Nov/15 Nov/16

May/15 May/16 May/17

Webpage Search (LHS) YoY growth (RHS) MAU (m) DAU (m)

Source: iResearch, Macquarie Research, October 2017 Source: iResearch, Macquarie Research, October 2017

Estimates revision

. We reduce our FY17 revenue forecast by 0.8% since Baidu will deconsolidate its food delivery from 4Q17 but raise FY17E non-GAAP net profit by 0.7% to reflect the margin recovery after spinning off the O2O business.

Fig 8 Estimate revisions New estimates (RMB mn) 3Q17E 4Q17E 2017E 2018E 2019E

Gross revenue 23,543 24,020 85,328 102,416 116,604 Gross profit 11,612 11,253 40,899 50,786 61,111 Operating profit 4,998 4,954 16,167 21,590 28,772 GAAP OPM 21.2% 20.6% 18.9% 21.1% 24.7% Non-GAAP net profit 5,137 5,851 18,607 24,325 30,209 Non-GAAP diluted EPS (RMB)* 14.16 13.90 48.03 63.82 85.76

Old estimates (RMB mn) 3Q17E 4Q17E 2017E 2018E 2019E

Gross revenue 23,543 24,747 86,055 102,437 116,585 Gross profit 11,612 11,692 41,338 50,792 61,090 Operating profit 4,998 4,761 15,974 21,591 28,755 GAAP OPM 21.2% 19.2% 18.6% 21.1% 24.7% Non-GAAP net profit 5,137 5,726 18,482 24,329 30,192 Non-GAAP diluted EPS (RMB)* 14.16 13.54 47.67 63.83 85.72

Revision 3Q17E 4Q17E 2017E 2018E 2019E

Gross revenue 0.0% -2.9% -0.8% 0.0% 0.0% Gross profit 0.0% -3.8% -1.1% 0.0% 0.0% Operating profit 0.0% 4.0% 1.2% 0.0% 0.1% Non-GAAP net profit 0.0% 2.2% 0.7% 0.0% 0.1% Non-GAAP diluted EPS 0.0% 2.6% 0.8% 0.0% 0.1% Source: Company data, Macquarie Research, October 2017 * Note: Our adjusted non-GAAP diluted EPS differ from the non-GAAP EPS shown on the front page, as we excluded other income (loss)

19 October 2017 4 Macquarie Research Baidu

Valuation . We maintain our TP of US$305 based on SOTP valuation of core search, iQiyi, Didi, Eleme, Ctrip and cash. . Note that we have not factored in any earnings or valuation contributions from DuerOS or Apollo, which presents potential upside to our SOTP valuation. . We forecast non-GAAP net profit from the core search business will reach Rmb30.4bn in 2018E. We value Baidu’s core search business at US$231 per share or US$81bn, based on 18x 2018E PE. We value iQiyi at US$18 per share or US$6bn, based on 2x FY18 EV/sales. Didi, Eleme and Ctrip are valued at $4, $1, and $19 dollar per share, respectively. Our TP for Ctrip is US$64, based on 37x FY18 PE or 1x PEG ratio.

Fig 9 SOTP valuation 2018E non-GAAP net 2018 gross revenue Fair value Contribution to Fair value per profit / loss (Rmb mn) (Rmb mn) Valuation (US$ bn) Baidu Stake Baidu (US$bn) share (US$)

Search 30,374 74,174 18x FY18 PE 80.6 100% 80.6 231 iQiyi 26,728 2x FY18 EV/sales 7.9 81% 6.3 18 Didi 50.0 3% 1.5 4 Eleme 6.0 5% 0.3 1 Ctrip 37x FY18 PE 33.2 20% 6.7 19 Net Cash as of 2018 11.4 100% 11.4 33 Total 107 305 Source: Company data, Macquarie Research, October 2017

19 October 2017 5 Macquarie Research Baidu

Fig 10 Financials Year Ending Dec 31 2014 2015 2016 2017E 2018E 2019E 16-17E 17E-18E 18E-21E

Consolidated income statement (RMB mn) Gross revenue 49,052 66,382 70,549 85,328 102,416 116,604 21% 20% 10% Net revenue 45,455 61,737 65,831 79,122 95,012 108,174 20% 20% 10% Cost of services -15,253 -22,764 -30,457 -38,224 -44,227 -47,063 26% 16% 6% Gross profit 30,201 38,973 35,374 40,899 50,786 61,111 16% 24% 13% GP margin 66% 63% 54% 52% 53% 56% (204 bps) 176 bps 428 bps SG&A (inc.SBC) -17,398 -27,302 -25,325 -24,732 -29,196 -32,339 -2% 18% 6% Operating profit 12,804 11,672 10,049 16,167 21,590 28,772 61% 34% 20% OP margin 28% 19% 15% 20% 23% 27% 517 bps 229 bps 713 bps Pre-tax income 14,475 37,907 14,509 19,094 26,540 32,831 32% 39% 19% Income taxes (Credit) -2,231 -5,474 -2,914 -3,597 -5,839 -6,566 23% 62% 15% Net income 13,187 33,664 11,632 15,548 20,781 26,345 34% 34% 20% Non-GAAP net income 14,150 13,186 9,599 16,742 22,325 30,122 74% 33% 22% EBITDA 16,776 17,532 18,377 23,226 28,855 36,471 26% 24% 17% EBITDA margin 37% 28% 28% 29% 30% 34% 144 bps 102 bps 642 bps Consolidated balance sheet (RMB mn) Current assets 65,841 78,234 99,759 145,720 164,336 186,870 46% 13% 15% Cash and cash equivalents 58,084 68,025 90,159 134,477 151,166 171,812 49% 12% 16% Receivables 3,664 3,927 4,109 5,204 6,527 7,750 27% 25% 14% Other current assets 4,092 6,281 5,491 6,040 6,644 7,308 10% 10% 10% Fixed assets 33,821 69,620 82,239 82,927 84,362 86,153 1% 2% 2% PP&E 8,705 10,627 11,294 12,419 14,072 15,972 10% 13% 12% Intangible assets (net) 3,574 3,335 3,872 3,436 3,218 3,109 -11% -6% -2% Goodwill 17,419 15,396 15,342 15,342 15,342 15,342 0% 0% 0% Other fixed assets 4,122 40,262 51,730 51,730 51,730 51,730 0% 0% 0% Total assets 99,662 147,853 181,997 228,647 248,698 273,022 26% 9% 11% Current liabilities 18,103 26,103 46,102 71,654 77,119 81,170 55% 8% 3% Accounts payable 12,965 17,636 21,895 21,383 25,242 27,959 -2% 18% 6% Customer deposit 4,296 5,420 6,032 7,295 8,756 9,969 21% 20% 10% Deferred rev 165 376 596 721 866 986 21% 20% 10% ST Loan 93 1,075 16,546 41,222 41,222 41,222 149% 0% 0% Other current liabilities 584 1,596 1,033 1,033 1,033 1,033 0% 0% 0% LT loan 23,814 33,942 34,471 39,555 32,776 25,996 -- -- -14% Other LT liabilities 3,238 3,593 3,682 3,314 2,983 2,684 -- -- -10% LT liabilities 27,053 37,535 38,153 42,869 35,758 28,681 12% -17% -14% Total liabilities 45,156 63,638 84,255 114,524 112,878 109,850 36% -1% -1% Shareholders' equity 54,506 84,216 97,742 114,123 135,820 163,172 17% 19% 20% Capital 3,634 6,402 8,323 9,155 10,071 11,078 10% 10% 10% Retained earnings 47,660 74,659 85,734 101,282 122,063 148,408 18% 21% 21% Other 3,212 3,154 3,686 3,686 3,686 3,686 0% 0% 0% Total Sh. equity + liabilities 99,662 147,853 181,997 228,647 248,698 273,022 26% 9% 11% Consolidated cash flow (RMB mn) Operating cash flow 17,937 19,422 22,258 21,840 31,585 36,207 -2% 45% 12% Net income 13,187 33,664 11,632 15,548 20,781 26,345 34% 34% 20% Depreciation & amortization 3,972 5,861 8,328 7,059 7,266 7,699 -15% 3% 6% Change in net working capital 3,907 4,566 5,137 -768 3,538 2,162 -115% -561% -65% Other -3,130 -24,669 -2,839 0 0 0 ------Investing cash flow -6,839 -23,835 -37,369 -7,747 -8,701 -9,490 -79% 12% 7% Capex -4,827 -5,230 -4,189 -4,747 -5,701 -6,490 13% 20% 10% Purchase of intangible assets -1,692 -2,735 -5,414 -3,000 -3,000 -3,000 -- -- 0% Other investments -320 -15,870 -27,766 0 0 0 -100% -- -- Financing cash flow 8,220 14,175 37,245 30,225 -6,195 -6,071 -19% -120% -154% Capital 706 2,711 2,452 832 916 1,007 -- -- 10% Others 18,704 Dividends 0 0 0 0 0 0 ------Debt increase (decrease) 7,514 11,464 16,089 29,393 -7,111 -7,078 -- -- -68% Effect of foreign exchange rate 80 179 0 0 0 0 ------changes Net change in cash 19,398 9,941 22,134 44,318 16,689 20,646 100% -62% 28% Cash at beginning of period 38,686 58,084 68,025 90,159 134,477 151,166 33% 49% 14% Cash at end of period 58,084 68,025 90,159 134,477 151,166 171,812 49% 12% 16% Source: Company data, Macquarie Research, October 2017

19 October 2017 6 Macquarie Research Baidu

Fig 11 Ratios YE 31 December 2014 2015 2016 2017E 2018E 2019E 16-17E 17E-18E 18E-21E

Per ADR EPADS, basic (USD) 6.07 14.88 4.83 6.61 8.80 11.11 37% 33% 19% EPADS, diluted (USD) 6.04 14.83 4.82 6.58 8.76 11.06 36% 33% 19% EPADS, non-GAAP (USD) 6.48 5.81 3.98 7.08 9.41 12.65 78% 33% 21% diluted DPADS, diluted (USD) 0.00 0.00 0.00 0.00 0.00 0.00 ------BVADS, diluted (USD) 24.98 37.09 40.51 48.29 57.27 68.53 19% 19% 19% Net cash per ADR (USD) 15.66 14.54 16.22 22.72 32.54 43.93 40% 43% 30% Avg. ADR, basic (mn) 350.6 349.2 346.6 347.2 348.3 349.7 0% 0% 0% Avg. ADR, diluted (mn) 352.0 350.4 347.5 348.6 349.8 351.2 0% 0% 0% Value EV/Revenue X 12.1 x 9.3 x 9.3 x 7.6 x 6.3 x 5.5 x ------EV/EBITDA X 32.7x 32.7 x 33.4 x 25.8 x 20.8 x 16.4 x ------Price/ Sales X 12.8x 9.9 x 9.9 x 8.0 x 6.7 x 5.9 x ------Price/ Book X 10.8x 7.3 x 6.7 x 5.6 x 4.7 x 3.9 x ------P/E (basic) X 44.6x 18.2 x 55.9 x 40.9 x 30.7 x 24.3 x ------Non-GAAP P/E (diluted) X 41.7x 46.5 x 68.0 x 38.2 x 28.7 x 21.4 x ------P/E (diluted, non-GAAP) X 39.3 x 44.0 x 63.9 x 35.0 x 25.3 x 17.9 x ------ex-cash Profit & loss Net revenue (USD mn) 7,331 9,527 9,482 11,671 14,015 15,957 23% 20% 10% EBITDA (USD mn) 2,706 2,706 2,647 3,426 4,256 5,380 29% 24% 17% EBIT (USD mn) 2,065 1,801 1,447 2,385 3,185 4,244 65% 34% 20% Non-GAAP Operating (USD mn) 2,220 2,015 1,701 2,836 3,707 4,814 67% 31% 19% profit Pretax profit (USD mn) 2,335 5,850 2,090 2,817 3,915 4,843 35% 39% 19% Net income (USD mn) 2,127 5,195 1,675 2,294 3,065 3,886 37% 34% 20% Non-GAAP Net Income (USD mn) 2,282 5,409 1,670 2,745 3,588 4,456 64% 31% #DIV/0! Profitability Gross margin % 62% 59% 50% 48% 50% 52% (221 bps) 166 bps 395 bps EBITDA margin % 37% 28% 28% 29% 30% 34% 144 bps 102 bps 642 bps Operating margin % 28% 19% 15% 20% 23% 27% 517 bps 229 bps 713 bps Non-GAAP OPM % 30% 21% 18% 24% 26% 30% 636 bps 215 bps 710 bps Net margin % 29% 55% 18% 20% 22% 24% 198 bps 222 bps 639 bps Non-GAAP net margin % 31% 57% 18% 24% 26% 28% 590 bps 209 bps 636 bps Cash Flow Operating Cash Flow (USD mn) 2,893 2,997 3,206 3,222 4,659 5,341 0% 45% 12% Free Cash Flow (USD mn) 1,915 -528 -2,286 1,721 2,794 3,450 -175% 62% 15% +EBIT*(1-t) (USD mn) 1,747 1,541 1,157 1,936 2,484 3,395 67% 28% 21% +D&A (USD mn) 641 904 1,199 1,041 1,072 1,136 -13% 3% 6% +Capex & Investments (USD mn) -1,103 -3,678 -5,382 -1,143 -1,283 -1,400 -79% 12% 7% +Change in NWC (USD mn) 630 705 740 -113 522 319 -115% -561% -65% Yield Dividend yield % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 bps 0 bps 0 bps FCF yield % 2.0% -0.6% -2.4% 1.8% 3.0% 3.6% 426 bps 113 bps 145 bps Earnings yield % 2.2% 5.5% 1.8% 2.4% 3.3% 4.1% 66 bps 81 bps 228 bps Balance sheet Net debt (cash) (USD mn) -5,512 -5,094 -5,638 -7,921 -11,383 -15,428 41% 44% 30% Net debt/ equity (USD mn) cash cash cash cash cash cash ------Shareholders' equity (USD mn) 8,791 12,996 14,078 16,834 20,034 24,069 20% 19% 20% Efficiency ROE (average) % 27.7% 48.5% 12.8% 15% 17% 18% 189 bps 195 bps 2 bps ROA (average) % 15% 27% 7% 8% 9% 10% 52 bps 113 bps 237 bps ROIC (average) % 18% 11% 8% 11% 13% 16% 324 bps 210 bps 273 bps Source: Company data, Macquarie Research, October 2017

19 October 2017 7 Macquarie Research Baidu

Macquarie Quant View

The quant model currently holds a marginally positive view on Baidu. The Attractive Displays where the strongest style exposure is Quality, indicating this stock is likely to have a company’s ranked based on superior and more stable underlying earnings stream. The weakest style s l the fundamental consensus

a exposure is Valuations, indicating this stock is over-priced in the market t

n Price Target and relative to its peers. e Macquarie’s Quantitative

m

a Alpha model. 286/804 d

n

u Two rankings: Local market Global rank in F (China) and Global sector Software & Services (Software & Services) % of BUY recommendations 47% (17/36) Quant Local market rank Global sector rank Number of Price Target downgrades 1 Number of Price Target upgrades 9

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.

Tencent 1.2 Tencent

Alphabet 0.8 Alphabet

Baidu 0.4 Baidu

NAVER 0.4 NAVER

Ctrip.com International -1.1 Ctrip.com International

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.

Tencent Tencent 0.3 Alphabet Alphabet -0.4 Baidu Baidu 0.2

NAVER NAVER -0.9

Ctrip.com International -0.3 Ctrip.com International

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative FCF Yield FY0 29% Score to sector(/804) to market(/412) Alpha Model Score 0.38 Sales Revisions 3 Month 22% Valuation -0.79 Price to Cash FY0 19% Growth 0.29 Price to Cash FY1 19% Profitability 0.35 Earnings Momentum 0.03 Earnings Certainty (NTM) -24% Price Momentum -0.02 Earnings Certainty -25% Quality 0.55 Capital & Funding 0.05 Operating Margin NTM -27% Liquidity 0.69 Turnover (USD) 250 Day -30% Risk -0.03 Technicals & Trading -0.70 -30% -20% -10% 0% 10% 20% 30% 0 50 100 0 50 100 0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

19 October 2017 8 Macquarie Research Baidu

Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 30 September 2017 AU/NZ Asia RSA USA CA EUR Outperform 50.38% 56.22% 40.70% 46.21% 63.85% 41.61% (for global coverage by Macquarie, 4.18% of stocks followed are investment banking clients) Neutral 37.50% 28.16% 43.02% 47.52% 30.00% 39.51% (for global coverage by Macquarie, 2.68% of stocks followed are investment banking clients) Underperform 12.12% 15.62% 16.28% 6.27% 6.15% 18.88% (for global coverage by Macquarie, 1.08% of stocks followed are investment banking clients)

BIDU US vs S&P 500, & rec history

(all figures in USD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, October 2017

12-month target price methodology BIDU US: US$305.00 based on a Sum of Parts methodology

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 25-Aug-2017 BIDU US Outperform US$305.00 29-Jul-2017 BIDU US Outperform US$252.00 28-Apr-2017 BIDU US Neutral US$189.00 04-Feb-2017 BIDU US Neutral US$182.00 29-Oct-2016 BIDU US Neutral US$179.00 29-Jul-2016 BIDU US Outperform US$199.00 27-Jul-2016 BIDU US Outperform US$237.00 16-Jun-2016 BIDU US Outperform US$245.00 30-Apr-2016 BIDU US Outperform US$251.00 19-Feb-2016 BIDU US Outperform US$246.00 02-Nov-2015 BIDU US Outperform US$252.00 29-Jul-2015 BIDU US Outperform US$234.00 30-Apr-2015 BIDU US Outperform US$267.00 16-Mar-2015 BIDU US Outperform US$278.00 30-Oct-2014 BIDU US Outperform US$300.00

Target price risk disclosures: BIDU US: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

19 October 2017 9 Macquarie Research Baidu Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. 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19 October 2017 10 Macquarie Research Baidu wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group

19 October 2017 11

Asia Research Head of Equity Research Internet, Media and Software Telecoms Peter Redhead (Global – Head) (44 20) 3037 4263 Wendy Huang (Asia) (852) 3922 3378 Allen Chang (Greater China) (852) 3922 1136 Jake Lynch (Asia – Head) (852) 3922 3583 Ivy Luo (Greater China) (852) 3922 1507 Soyun Shin (Korea) (822) 3705 8659 David Gibson (Japan – Head) (813) 3512 7880 Marcus Yang (Greater China) (8862) 2734 7532 Prem Jearajasingam (ASEAN) (603) 2059 8989 Conrad Werner (ASEAN – Head) (65) 6601 0182 David Gibson (Japan) (813) 3512 7880 Kervin Sisayan (Philippines) (632) 857 0893 Soyun Shin (Korea) (822) 3705 8659 Nathania Nurhalim (Indonesia) (6221) 2598 8365 Automobiles, Auto Parts Alankar Garude (India) (9122) 6720 4134 Utilities, Renewables Janet Lewis (China, Japan) (813) 3512 7856 Oil, Gas and Petrochemicals Allen Yuan (China) (8621) 2412 9009 Patrick Dai (China) (8621) 2412 9082 James Hong (Korea) (822) 3705 8661 Aditya Suresh (Asia) (852) 3922 1265 Yingying Tang (China) (852) 3922 3289 Amit Mishra (India) (9122) 6720 4084 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Yasuhiro Nakada (Japan) (813) 3512 7862 Karisa Magpayo (Philippines) (632) 857 0899 Financials Anna Park (Korea) (822) 3705 8669 Commodities Scott Russell (Asia) (852) 3922 3567 Corinne Jian (Taiwan) (8862) 2734 7522 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Isaac Chow (Malaysia) (603) 2059 8982 Jim Lennon (Global) (44 20) 3037 4271 Keisuke Moriyama (Japan) (813) 3512 7476 Yupapan Polpornprasert (Thailand) (662) 694 7729 Matthew Turner (Global) (44 20) 3037 4340 Chan Hwang (Korea) (822) 3705 8643 Pharmaceuticals and Healthcare Vivienne Lloyd (Global) (44 20) 3037 4530 Suresh Ganapathy (India) (9122) 6720 4078 Serafino Capoferri (Global) (44 20) 3037 2517 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Wei Li (China, Hong Kong) (852) 3922 5494 Lynn Zhao (Global) (86 21) 2412 9035 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Alankar Garude (India) (9122) 6720 4134 Gilbert Lopez (Philippines) (632) 857 0892 Patti Tomaitrichitr (Thailand) (662) 694 7727 Economics and Macro Ken Ang (Singapore) (65) 6601 0836 Ric Deverell (612) 8232 4307 Passakorn Linmaneechote (Thailand) (662) 694 7728 Property, REIT (Chief Economist & Head of Macro Research) Conglomerates Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Peter Eadon-Clarke (Global) (813) 3512 7850 David Ng (China, Hong Kong) (852) 3922 1291 Larry Hu (China, Hong Kong) (852) 3922 3778 David Ng (China, Hong Kong) (852) 3922 1291 Wilson Ho (China) (852) 3922 3248 Upasana Chachra (India) (9122) 6720 4355 Conrad Werner (Singapore) (65) 6601 0182 Keisuke Moriyama (Japan) (813) 3512 7476 Quantitative, CPG Gilbert Lopez (Philippines) (632) 857 0892 William Montgomery (Japan) (813) 3512 7864 Corinne Jian (Taiwan) (8862) 2734 7522 Gurvinder Brar (Global) (44 20) 3037 4036 Consumer, Gaming Abhishek Bhandari (India) (9122) 6720 4088 Alvin Chao (Asia) (852) 3922 1108 Linda Huang (Asia) (852) 3922 4068 Aiman Mohamad (Malaysia) (603) 2059 8986 Tracy Chow (Asia) (852) 3922 4285 Zibo Chen (China, Hong Kong) (852) 3922 1130 Kervin Sisayan (Philippines) (632) 857 0893 YingYing Hou (Asia) (852) 3922 5422 Patti Tomaitrichitr (Thailand) (662) 694 7727 Terence Chang (China, Hong Kong) (852) 3922 3581 Strategy, Country Sunny Chow (China, Hong Kong) (852) 3922 3768 Materials Stella Li (China, Taiwan) (8862) 2734 7514 Viktor Shvets (Asia, Global) (852) 3922 3883 Satsuki Kawasaki (Japan) (813) 3512 7870 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Chetan Seth (Asia) (852) 3922 4769 Kwang Cho (Korea) (822) 3705 4953 Coria Chow (China, Hong Kong) (852) 3922 1181 David Ng (China, Hong Kong) (852) 3922 1291 KJ Lee (Korea) (822) 3705 9935 Yasuhiro Nakada (Japan) (813) 3512 7862 Peter Eadon-Clarke (Japan) (813) 3512 7850 Amit Sinha (India) (9122) 6720 4085 Anna Park (Korea) (822) 3705 8669 Chan Hwang (Korea) (822) 3705 8643 Karisa Magpayo (Philippines) (632) 857 0899 Sumangal Nevatia (India) (9122) 6720 4093 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Chalinee Congmuang (Thailand) (662) 694 7993 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Emerging Leaders Technology Jayden Vantarakis (Indonesia) (6221) 2598 8310 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Jake Lynch (Asia) (852) 3922 3583 Damian Thong (Asia, Japan) (813) 3512 7877 Gilbert Lopez (Philippines) (632) 857 0892 Kwang Cho (Korea) (822) 3705 4953 Allen Chang (Greater China) (852) 3922 1136 Conrad Werner (ASEAN, Singapore) (65) 6601 0182 Corinne Jian (Greater China) (8862) 2734 7522 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Passakorn Linmaneechote (Thailand) (662) 694 7728 Conrad Werner (ASEAN) (65) 6601 0182 Chris Yu (Greater China) (8621) 2412 9024 Kaylin Tsai (Greater China) (8862) 2734 7523 Industrials, Transport and Infrastructure Find our research at Louis Cheng (Greater China) (8862) 2734 7526 Macquarie: www.macquarieresearch.com Patrick Dai (China) (8621) 2412 9082 Lynn Luo (Greater China) (8862) 2734 7534 Thomson: www.thomson.com/financial Eric Zong (China, Hong Kong) (852) 3922 4749 Patrick Liao (Greater China) (8862) 2734 7515 Reuters: www.knowledge.reuters.com Kunio Sakaida (Japan) (813) 3512 7873 Verena Jeng (Greater China) (852) 3922 3766 Bloomberg: MAC GO William Montgomery (Japan) (813) 3512 7864 Chenyu Yao (Japan) (813) 3512 7849 Factset: http://www.factset.com/home.aspx James Hong (Korea) (822) 3705 8661 Daniel Kim (Korea) (822) 3705 8641 CapitalIQ www.capitaliq.com Abhishek Bhandari (India) (9122) 6720 4088 Email [email protected] for access Corinne Jian (Taiwan) (8862) 2734 7522 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Azita Nazrene (ASEAN) (65) 6601 0560

Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Amelia Mehta (Asia) (65) 6601 0211 Angus Kent (Thailand) (662) 694 7601 Michael Santos (Philippines) (632) 857 0813 Jeff Evans (Boston) (1 617) 598 2508 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Chris Reale (New York) (1 212) 231 2555 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Christina Lee (UK/Europe) (44 20) 3037 4873 Marc Rosa (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Justin Morrison (Singapore) (65) 6601 0288 Thomas Renz (Geneva) (41 22) 818 7712 Sales Trading Daniel Clarke (Taiwan) (8862) 2734 7580 Tomohiro Takahashi (Japan) (813) 3512 7823 Adam Zaki (Asia) (852) 3922 2002 Brendan Rake (Thailand) (662) 694 7707 John Jay Lee (Korea) (822) 3705 9988 Stanley Dunda (Indonesia) (6221) 515 1555 Mike Keen (UK/Europe) (44 20) 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Gino C Rojas (Philippines) (632) 857 0861

This publication was disseminated on 19 October 2017 at 12:17 UTC.