Accelerating innovation. Baidu’s pace of innovation continues to accelerate,helping to improve user scale and satisfaction. Engagement and monetization ofMobile Baidu is being driven by AI-led systematic improvements to search and newsfeed. Daily user time spent on Mobile Baidu grew 15% q-o-q, DAU/MAU grew 2pptsy-o-y, paid clicks are growing double digits y-o-y and clicked-on content/displayedheadlines doubled y-o-y. AI is delivering a “1and done” search experience, asqueries are answered by top search results. AI is having an even more potent role innews feed, with personalized recommendations and Baidu’s unique data assets(search queries) leading to higher conversions and improved user experience. Newsfeed content is being enriched with short form video, user generated content (UGC),Q&A, sports and content social sharing. Baidu launched a new ad product, calleddynamic ads, in its feed, integrating shopping data with feed ads. Ctrip and JD.comhave been early adopters and have experienced sharp improvements in ROI. Newsfeed revenue is annualizing USD1bn in revenue. iQiyi video had 116m DAUs inAugust, with total time spent growing 30% y-o-y. Overall, these efforts droveaccelerating revenue and margin growth in 3Q.    AI ramping. Project Apollo has 74partners and Baidu expects trucks with L3capabilities to launch in 2018and cars in 2019. Its Du’er intelligent device platformwill be embedded in TCL, Lenovo, Xiaomi, FAW and Hyundai models. Its cloud stackhas 68AI technologies, and its FSG unit has 300financial institutions on its platform.    Strong 3Q results. Total revenue grew 29% to RMB23.5bn, in line with consensus.Adjusted EPS was RMB25.94, helped by a gain from disposal of Deliveries. Excludingthis item, EPS would have been c1.5x above consensus. Adjusted operating margins(OPM) grew 600bps y-o-y to 24%. SGA expenses were 28% higher than our estimate butincluded RMB522m allowance for bad debt associated with the sale of Baidu Deliveries.    One-off items impact 4Q guidance. As per company guidance, revenue shouldgrow 22-29% y-o-y to RMB22.23bn-23.41bn. Excluding disposed businesses (MobileGames and Deliveries), y-o-y growth would be 28-34%. Consensus expected 37%y-o-y growth. We note that iQiyi revenue will be negatively impacted by the NPC,a RMB700m impact to 4Q. Excluding iQiyi and disposals, 4Q revenue (search andnews feed) is guided to grow 30% y-o-y in 4Q, versus 26% in 3Q.    Maintain Buy rating, raise TP to USD295from USD282. For 2017e, 2018e and 2019e,we trim revenue by 4%, 3% and 2% to reflect iQiyi and disposals and raise adjusted EPSby 6%, 1% and 2% to reflect slightly higher margins on lower traffic acquisition costs.

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