We maintain our Underperform recommendation on Baidu following its weak 4Q25 results. Revenues fell amid the continued contraction in online ads, while EBITDA margin fell YoY due to an increased revenue mix of the lower-margin AI cloud segment and weak monetization of its search engine; gross leverage further weakened and net cash narrowed. Baidu trades in-line to Asia A corp and 9 bp tighter than Asia A- corp which we view as rich; this is because we expect its debt metrics to remain weak compared to its historical levels over the next 12-24 months given the challenging outlook of its advertising segment and weak margins of its AI cloud segment. In our view, Baidu should be trading closer to A- corps. We also think Baidu is expensive compared to BABA and TENCNT.

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).

Intense competition in online ads segment may pressure topline and EBITDA margin.