Huatai Securities: Baidu AI reshapes long-term narrative, raises target price to 236 yuan, expects Kunlun Core business per share valuation of 40.1 yuan

Huatai Securities recently (on the 14th) published a report stating that AI is reshaping the long-term narrative of Baidu-W (09888.HK). As one of the few domestic internet companies that integrates self-developed chip capabilities, AI infrastructure service capabilities, and AI application scenarios (advertising, autonomous driving, tool applications, etc.), there are several significantly undervalued business assets within the Baidu system, such as autonomous driving business, self-developed Kunlun chip business, Baidu Wenku, and Baidu Cloud Disk, which have AI functions or attributes.

With the continuous iteration of AI large model capabilities in the industry and the ongoing penetration of AI applications, the firm expects that Baidu's AI-related businesses are likely to be repriced as their scale continues to expand. The firm adjusted the valuation components for Baidu's comprehensive approach, repricing several smaller-scale businesses with good development potential. It maintained a "Buy" rating, significantly raising the target price to HKD 236 (previously HKD 88), corresponding to forecasted non-GAAP price-to-earnings ratios of 31.6 times and 28.3 times for this year and next year, respectively. The business segment valuations include: core advertising business forecasted price-to-earnings ratio of 5 times this year, AI cloud business forecasted price-to-sales ratio of 7.5 times this year, Kunlun chip business valuation forecasted price-to-sales ratio of 25 times this year, and autonomous driving business valuation forecasted price-to-sales ratio of 25 times this year.

The firm pointed out regarding Baidu's Kunlun chip: In April this year, Baidu founder Robin Li announced at the Create conference the activation of the fully self-developed 30,000-card Kunlun chip P800 cluster, which can simultaneously support multiple full-blooded Deepseek and other hundred-billion-parameter large models for full training, and can also support 1,000 customers simultaneously conducting hundred-billion-parameter large model tuning. The firm believes that self-developed chip capabilities are expected to help Baidu provide services to customers in a stable and cost-effective manner and assist Baidu in capturing customer demand during the domestic substitution process.

Huatai Securities indicated that Baidu's self-developed chip capabilities are one of the differentiated advantages of the company compared to other cloud service providers, which is expected to help it provide high-cost performance AI cloud services to customers more stably and sustainably. Meanwhile, against the backdrop of domestic substitution, Baidu's self-developed chips are also expected to help it further capture customer-related demand and create new revenue contributions. According to IDC data, in 2024, Baidu ranked third in the shipment volume of data center chip manufacturers in China with 69,000 chips, behind Nvidia and Ascend's 1.9 million and 640,000 chips, respectively, leading Cambricon (688256.SH) with 26,000 chips. According to a report from Kunlun Chip Technology's public account on August 21 this year, Kunlun Chip won a billion-level order in China Mobile's centralized procurement project. In the firm's view, Baidu's long-standing accumulation of chip technology is gradually showing its effectiveness.

The firm gives Baidu's Kunlun chip a valuation of HKD 40.1 per ordinary share, based on a forecasted price-to-sales ratio of 25 times this year and Baidu's 59% equity stake, which is slightly higher than the comparable company's average of 22.9 times. The firm selected companies engaged in chip business such as Nvidia, AMD, Intel, Broadcom, Cambricon, SMIC, and Qualcomm as comparable companies for Kunlun Chip It is believed that the recent winning of a 1 billion yuan-level order by Kunlun Core from China Mobile proves its chip level to a certain extent. With the support of its self-developed chip capabilities, the bank expects that Baidu AI Cloud's full-stack capabilities are likely to be further strengthened, which will help it provide relevant services to customers in a stable and efficient manner, and also assist in capturing the strong demand opportunities during the domestic market's localization replacement process.

The bank expects that by 2025, Kunlun Core's external revenue scale will be roughly comparable to that of another leading domestic manufacturer, Cambricon (according to Wind data, Cambricon's consensus revenue expectation for 2025 is about 6.7 billion yuan). Therefore, referencing Cambricon's valuation level, the bank believes that assigning Kunlun Core a valuation level above the average of comparable companies is reasonable, reflecting the valuation premium of China's leading domestic replacement. If Kunlun Core adopts a more neutral business positioning in the future, it may gain faster revenue growth opportunities, and its valuation level may further align with Cambricon