Baidu seems to maintain its dominant position in mobile search area with little immediate competition. On Baidu, mobile traffic in 3Q for the first time surpassed PC traffic, with the rev contribution hitting 36%. We expect this number to increase to 39% in 4Q, mainly driven by ever-growing mobile traffic and narrowing CPC discount to PC. Baidu is once again restructuring (last done mid-13) into: 1) Mobile Services (combining Mobile cloud & LBS), 2) Emerging Business (combining New Business, User Spend, Globalization), 3) Search (combining the Cloud and Mobile Search Union teams).
In order to ?connect people and service?, we expect to see deepening offline campaigns for O2O offerings such as Baidu Connect and Baidu Nuomi group-buy, which could pose pressure on further margin recovery in 2015. This new O2O offering, launched in 3Q, currently has covered ~ 500K offline merchants, who are mainly engaged in dining, travel, education, finance services etc
Baidu Investing in Lenovo SmartPhone
Baidu is investing over USD100m in Lenovo's Fancy Maker smartphone brand. With all of China's large internet platforms eyeing OS development, we view this small investment as betting conservatively on a very high-risk, low margin area.
