Text / Futuo Research Author / Tiancheng Henry Baidu, a former Chinese Internet search giant, has long dropped out of the first echelon of the Internet. Now the name “BAT” has been replaced by “ATM”-Ali, Tencent, and Meituan.In terms of market capitalization, Baidu ranks fifth among Chinese Internet companies, after Meituan and JD.com.Data source: Wind on the rise and fall, Baidu’s 20% decline in 2019 ranked last. If this trend continues, Baidu’s market value ranking is likely to decline further.Data source: Wind Baidu’s stock price is so weak for two reasons: First, the general environment is weak, and the overall growth of the advertising industry has slowed.The capacity growth rate of China’s mobile Internet advertising market is declining, and growth is under pressure. As a barometer of the Internet economy, it fully reflects the commercial value of the advertising market.The second is structural factors. Despite the overall weakness, the trend of the Internet advertising industry in 2019 is that the e-commerce, social, and video advertising markets cannibalize the search advertising market, and search advertising is squeezed.Data source: The Zhongguancun Interactive Marketing Lab is getting more and more fierce from headlines, tremolos, and quick hands. Advertisers have more and more channels to choose from, and general advertisers tend to invest resources in new traffic.Because of its better conversion effect, coupled with the fact that the mobile Internet accounts for the mountain, the problem of information islands has always existed, leading to a dwindling search market.So the question is: Will Baidu stay behind until it becomes trivial?My view is that there will be a recovery in the short term, the valuation will increase, and the long-term competitiveness remains to be seen. The short-term investment value, specifically, has the following points: First, return to Hong Kong for a secondary listing and increase the valuation on November 26.Alibaba officially listed on the Hong Kong Stock Exchange for a second time, with an issue price of HK $ 176 per share, which opened 6.25% higher on the first day of listing.As of January 14, 2020, Alibaba’s Hong Kong shares have risen by 27%, with a total market value of HK $ 4.8 trillion, becoming the king of Hong Kong shares’ market value.Source of the market: Futu Securities’ Alibaba US stocks also continued to rise. Since November 26, Alibaba US stocks have risen 21%.Source of the market: Futu Securities previously, there have been many media reports that Baidu plans to return to Hong Kong for secondary listing and has contacted some large institutions in Hong Kong.A person familiar with the matter said that Baidu has planned to return to Hong Kong for some time, and progress may be faster than Ctrip and so on.As domestic investors have a deeper understanding of Chinese Internet companies than foreign investors, especially after the subsequent entry into the Hong Kong Stock Connect, they will obtain the investment needs of the southward capital. Therefore, after the secondary listing of Ali, other overseas high-quality assets will be listed after the secondary listing.It will also obtain the demand for high allocation of domestic funds and raise its own valuation.Second, profit rebound Baidu’s 2019 Q3 financial report shows that Q3 operating profit was 2.4 billion yuan, Non-GAAP’s net profit attributable to the company was 4.4 billion yuan, all exceeding Bloomberg consensus expectations-its profit recovery trend is continuing.The main reason was that the flow costs and sales management expenses were better controlled, and the company’s adjusted net profit attributable to mothers decreased by 34.4% year-on-year to 4.39 billion yuan, higher than market expectations of 56.2%. The adjusted net profit attributable to mothers was 15.6%, an increase of 1.8 from the previous quarter.%, Two consecutive quarters to achieve a quarter-on-quarter rebound in profitability.Looking ahead to 2020, I believe that Baidu’s cost ratio will be further controlled, driving Baidu’s profit recovery, and it may continue to release profit data that exceeds market expectations in the future.Third, value revaluation We all know that the search business is the cornerstone of Baidu. As long as the foundation of search is not shaken, the value of Baidu is still there. Although Toutiao is doing the search business today, it has not yet affected Baidu. Other search engines are currently looking atIn the future, it cannot pose a threat to Baidu.Judging from the ranking, compared to 2018, the overall search engine in China has not changed much: Baidu is still an absolute leader with a slight increase in market share of 1.1%.Sogou ’s search market share is relatively stable, maintaining at around 14% in the past year.Source: Prospective Industry Research Institute. Let ’s take a look at the valuation of each of its segments: 1. The environmental impact of Baidu ’s core business. The growth of Baidu ’s online marketing business this year has continued to decline, and Q2 and Q3 have fallen by close to -10%.However, from the perspective of user data, the DAU of Baidu APP in 19Q3 increased by 25% year-on-year to 189 million, and the net increase in the quarter was 1 million.According to QuestMobile, the MAU of the Baidu app in September 2019 reached 460 million, a net increase of about 7 million from June.In addition, Baidu Mini Programs still maintained high growth. The Q3 Mini Programs had a MAU of 290 million, a net increase of 20 million from the previous month, and there was still room for improvement in user penetration.It can be seen that Baidu’s traffic is still growing, and the search business is expected to recover in the future.In 2018, Baidu achieved revenue of 78.27 billion yuan, Non Gaap’s net profit of 28.47 billion yuan, and a net profit rate of 36.4%. Assuming that revenue does not increase this year, the net profit margin has dropped significantly to 24%. It is estimated that the core business net profit in 2019 will be 18.7 billion yuan.The valuation is calculated based on 12 times of static PE in 18 years, and the search business is valued at US $ 32 billion.2. iQiyi currently holds 56.67% of iQiyi’s shares, iQiyi currently has a market value of US $ 17.4 billion, and Baidu holds some corresponding market value of US $ 9.86 billion.3. Ctrip currently holds a 11.75% stake in Ctrip. Ctrip currently has a market value of US $ 22.2 billion, and Baidu holds some of its corresponding market value of US $ 2.61 billion.4. Cash and equivalents As of 2019Q3, irrespective of iQiyi’s cash portion, Baidu’s cash and equivalents reached 123.5 billion yuan, corresponding to US $ 17.64 billion.Adding the above segments together, Baidu’s theoretical market value should be US $ 62.1 billion, compared with the current market value of US $ 50 billion, with 24% upside (the valuation of Baidu’s AI and autonomous driving businesses has not been considered here,Think of it as an option in the future).Concluding remarks Frozen three feet is not a day cold.Baidu, who wants a secondary listing, is obviously not satisfied with its valuation. In the short term, there is indeed room for improvement, but in the long run, Baidu must solve some fundamental problems, such as the search business caused by information islands.Weakening.Li Yanhong said that more and more apps no longer rely on search engines, applications are becoming isolated islands, large apps have become independent, and their content services cannot be obtained by search engines.In recent years, giants such as Ali, Tencent, and JD.com have intensively laid out information flow and other fields. Baidu has become more and more difficult. The demand for search engines by ordinary people has weakened, but the foundation of Baidu and the source of traffic is still search.Of course, if we look at the ecology of Baidu further, we will find that what Baidu lacks is actually the ecological evolutionary ability.Baidu has always focused on the search track, but it was not sure about the expansion of the emerging information flow recommendation. Instead, it was snatched by today’s headlines. Byte Beat has used the information flow mode to make a giant that connects people and content.In contrast, Ali and Tencent have continuously enriched their wings over the years, and nothing can shake their status.So, is Baidu a “value opportunity” or a “value trap”?For the time being, it is not easy to judge. Maybe in the AI era, Baidu will re-glow again, but in the short term, Baidu is cheap enough if it falls to this share. If it does return to Hong Kong for a second listing, it will be a wave of revaluation.Chances are pretty good.Editor / Edward Risk Tip: The opinions of the authors or guests shown above all have their specific positions, and investment decisions need to be based on independent thinking.Futu will endeavor but cannot guarantee the accuracy and reliability of the above content, and will not assume any loss or damage caused by any inaccuracies or omissions..