Baidu Inc:Buy,Takeaways from the post-results NDR

We hosted a post-results non-deal roadshow (NDR) for Baidu. Investors were mostlyfocused on: 1) how the feed feature is impacting revenue and the user experience;and 2) artificial intelligence (AI) spending updates.

    Feed is query-less search. We believe Baidu’s feed feature is a natural evolution of itssearch engine, leveraging its understanding of user interest and intent to deliver apersonalised information feed. Search queries are direct and specific, while contentfeeds can occupy fragmented time and compliment a search experience (Google’s(Alphabet; GOOG US, Not Rated) latest search app includes a content feed.)Compared to its peers, Baidu has a substantial channel advantage with over 660mmonthly active users (MAUs) on mobile and 100m daily active users (DAUs) on itsplatform. Baidu essentially has partnerships with all content creators in China and hasample data to train its algorithms to deliver relevant content to users. Further, whilesearch ads are mostly direct responses, content feed ads are mostly brand ads, andBaidu has seen strong adoption from its advertising customers. When users click onads within an article, revenue is shared with the content creator. However, we believeusers typically click on ads in the feed and that revenue is not shared with contentcreators. Baidu believes it will be the leader in time spent on news feeds in the future.Content feed revenue doubled q-o-q and will be material by year-end 2017, in our view.

    Search is a reflection of human thoughts. Based on queries and location, Baiduhas a substantial amount of knowledge about its users. It knows what users areinterested in and the company’s algorithms can predict what content might interestusers. Baidu has accumulated significant user data and has indexed China and theworld, posing significant barriers to entry.

    iQiyi. Baidu expects to release a number of new hit original shows in 2H17to furthergrow its leading subscriber base; 35% of its library is original content and its originalshow “RapChina”, the first hip-hop show in China, is a hit with 700m views. iQiyicould reach breakeven by 2019, in our view, and we believe an IPO is the most likelyscenario to reward management and unlock value. Content costs will likely grow lessthan 100% this year.

    AI. Baidu has four AI initiatives: 1) Du’er OS; 2) autonomous driving; 3) FinancialServices Group (FSG); and 4) AI, Big Data and Cloud (ABC). Du’er has partneredwith 100consumer appliance OEMs and products will be shipped soon, according to