Advertising Business Still Challenged by Macro Conditions but AI Becoming Material to Valuation

Baidu’s online advertising business accounted for 79% of Core revenue in 2024 and will be the main source of revenue in the medium term, given its dominant market share for search engines, but we believe that unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also artificial intelligence, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China's AI development, but whether Ernie will be the long-term leader will depend on execution, as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.