Broker: UOB Kay Hian
Date of Report: Thursday, 21 August 2025
Baidu Inc 2Q25: Missed Expectations, AI Cloud Growth and Next-Gen Ernie Bot Awaited

Overview: Baidu Inc Faces Mixed Fortunes in 2Q25

Baidu Inc (9888 HK), a leading Chinese internet and AI company, posted a challenging second quarter for 2025, with earnings falling short of expectations despite notable growth in its AI Cloud segment. The company continues to invest heavily in innovation, particularly in generative AI and autonomous driving, while its traditional online advertising business faces macroeconomic headwinds.

Stock Snapshot and Shareholder Overview

• Share Price: HK\$87.25
• Target Price: HK\$88.00
• Upside Potential: +0.9%
• Market Cap (HKD): 244.7 billion
• Major Shareholders: BlackRock Inc (6.6%), BBH & CO (4.8%), Vanguard Group Inc (4.1%)
• GICS Sector: Communication Services

2Q25 Financial Performance: Weak Top-Line and Margin Pressure

Baidu’s 2Q25 results reflected weak momentum in its core business, pressured by ongoing softness in the advertising market and increased investments in AI initiatives.

Key Observations and Segment Highlights

• Online Marketing: Revenue tumbled 15% YoY, indicating ongoing weakness in the advertising market, with macroeconomic pressures and business structure changes cited as contributing factors.
• AI Cloud: Revenue surged by 27% YoY, supported by subscription-based AI infrastructure (over 50% YoY growth). Cloud now accounts for 25% of Baidu Core revenue, maintaining momentum from the previous quarter.
• Baidu App: Monthly active users (MAU) reached 735 million (+5% YoY). Notably, 50% of search results are now AI-generated (up from 35% in April), and mobile search result pages with AI content hit 64% in July.
• AI Agents: Revenue from agents for advertisers grew 50% YoY, now contributing 13% of Core online marketing revenue (up from 9% in Q1).
• Gross Margin: Dropped 8ppt YoY to 43.9%, driven by the expansion of the lower-margin AI Cloud business.
• Operating Margin: Non-GAAP operating margin fell 9ppt YoY to 14%, reflecting heavy investments in Ernie Bot and AI.
• Net Margin: Non-GAAP net margin stood at 14.7%, down 7ppt YoY.

Innovation and Strategic Initiatives

• Next-Gen Ernie Bot: Baidu is developing a next-generation flagship large language model (LLM) with marked improvements across core capabilities. The new inference version of Ernie Bot is expected to launch by the end of August.
• Application-Driven AI: Baidu advances the AI transformation of search, generating and ranking multimodal results. Cloud customers are now paying for Baidu’s search API to power RAG (Retrieval-Augmented Generation) in generative AI applications.
• Digital Human Technology: Baidu’s hyper-realistic digital humans now match or surpass real human performance in live-stream e-commerce, driving stronger consumer purchases and demand from cloud customers.
• Apollo Go Autonomous Driving: Provided approximately 2.2 million rides in 2Q25 (+148% YoY), with cumulative rides surpassing 14 million by August 2025.
• iQiyi Segment: iQiyi revenue dropped 11% YoY to Rmb6.6b, mainly due to a 13% decline in advertising and a 9% dip in membership services. Operating margin contracted to a 1% loss, versus a 5% profit in Q1.

Shareholder Returns and Capital Management

• Baidu returned US\$677 million to shareholders in 1H25, with cumulative repurchases totaling US\$2.3 billion, representing 7.5% of market capitalization.

Financial Forecasts and Key Ratios

Segment Valuation and SOTP Breakdown

Earnings Revision, Risks, and Valuation

• Revenue forecasts for Q3 2025 and FY2025 have been reduced by 3% and 2%, respectively, with anticipated YoY declines of 3% and 1%.
• Advertising business is expected to remain under pressure, with projected declines of 14% (total revenue) and 15% (ads revenue) in Q3 2025.
• Non-GAAP net profit forecasts for Q3 2025/FY2025 have been cut by 25%/4%, with adjusted net profit estimates of Rmb4.9b/Rmb26.6b.
• Risks: Weak advertising due to macro softness and competition, uncertainties in autonomous driving, and the US ban on advanced chip supply to Chinese tech companies.
• Valuation remains attractive: Target price HK\$88.00 implies 9x 2026F PE, with Baidu currently trading at 8.7x 2026F PE, below its historical mean of 14.5x.

Share Price Catalysts and Forward Outlook

• Potential share price catalysts include market share expansion in AI cloud and autonomous driving, improved monetisation across business units, and greater synergies between Baidu’s core and new initiatives.

Balance Sheet and Cash Flow Summary

Profitability, Growth, and Leverage Metrics

• EBITDA Margin: Expected to decline from 21.1% (2024) to 15.9% (2025F), before a recovery to 17.8% (2027F).
• Net Margin: Forecast to move from 18.2% (2024) to 17.9% (2025F), dipping to 15.1% (2026F) then rebounding to 16.9% (2027F).
• ROE: Declining from 9.5% (2024) to 8.5% (2025F) and further to 6.9% (2026F), with a projected improvement to 7.5% (2027F).
• Debt to Total Capital: Expected to remain low, around 1% in 2025F-2027F.
• Net Debt/(Cash) to Equity: Improving from -9.8% (2024) to -30.8% (2027F).

Conclusion: Cautious Optimism as Baidu Navigates Transition

Baidu Inc’s 2Q25 results underscore the challenges of navigating a rapidly evolving technology landscape. While core advertising faces macro and competitive pressures, the company’s aggressive push into AI cloud, generative AI, and autonomous driving lays the groundwork for future growth. The near-term outlook remains muted, but ongoing innovation and potential market share gains in new segments could provide upside for patient investors.

• Recommendation: Maintain HOLD with a target price of HK\$88.00 (US\$98.00), implying 9x 2026F PE. Baidu currently trades below its historical mean, offering value for those willing to look beyond current headwinds.

Key Catalysts to Watch:

• Expansion in AI cloud and autonomous driving
• Improved monetisation across business units
• Increased synergies between core and new initiatives