We maintain our M/P on Baidu post its uninspiring 1Q25 results; topline growth was ahead of expectation on strong AI cloud demand, but EBITDA margin fell on a weaker revenue mix, FOCF turned negative on higher AI investments, debt metrics weakened, and net cash contracted. We expect a modest deterioration in Baidu’s debt metrics compared to YE24. We continue preferring Alibaba and Tencent over Baidu among A-rated China tech credits. We like the stronger balance sheet, larger scale, stronger business positions, and better credit outlook of Alibaba and Tencent. Baidu trades only 3-8 bp wider than Alibaba and Tencent which we view as rich given the limited improvement in its debt metrics over the next 12 months. For investors looking for exposure in Baidu, we prefer its Apr-2030.

Any regulatory clampdowns abroad and domestically (e.g. potential US investment ban, antitrust rules, data security and personal information protection laws) may adversely affect the business of Baidu. The interpretation of Chinese laws and regulations involves some degree of uncertainty.

There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).

Baidu has made significant investments into long-term AI-related projects, which may take time to turn profitable. A potential escalation of the US chip restriction could have a material negative impact its AI related business (ie. cloud, ernie bot, autonomous driving).