1、EQUITY:INTERNET&NEW MEDIABaidu BIDU.OQ BIDU USGlobal Markets Research21 August 2025AI challenge for search ads on full displayRecovery in search ads not yet in sight.Maintain Neutral 2Q25 above low market expectationsBaidu Core(excluding iQIYI IQ US,Neutral)reported a 2%y-y revenue decline in 2Q25(F

2、ig.1),largely in line with Bloomberg consensus/our estimates of a 3%y-y drop.Its non-GAAP operating profit(OP)fell 37.4%y-y to CNY4.4bn,12%/9%above Street consensus/our estimates on higher margins.Operating profit margin(OPM)contracted 9.5pp y-y to 16.7%mainly due to weakened ads business.By busines

3、s line,Baidu Cores online marketing revenue dropped 15%y-y,due to the aggressive integration of AI into search.AI-generated content is now enclosed in over 50%of mobile search pages,up from 35%in April.While this enhances user experience,monetization remains limited.Baidus Cloud revenue grew 27%y-y,

4、largely in line with our expectation but slower than the 42%growth in 1Q due to lower contribution from the project-based cloud contracts that have more volatile growth than that of subscription-based cloud contracts.Disruption to search ads likely deepening from AI integrationWe forecast Baidus sea

5、rch ads to drop 22%and 16%y-y respectively in 3/4Q25F backed by:1)increased embracing of AI-generated contents in its search results which cannibalize its search ads inventories;and 2)rising competition in the AI search arena which could impact Baidus overall search volume.Baidu disclosed a few init

6、iatives it is currently piloting to monetize its AI capabilities in its internet services.AI agents and digital humans are the two AI-enabled tools provided to its advertisers from the healthcare,travel,education and ecommerce verticals,which indirectly helped generate 13%and 3%of Baidu Cores ads re