Baidu files for dual primary listing; Southbound inclusion and non-core asset actions provide short-term catalysts

Overview

This report focuses on Baidu's announcement that it plans to convert its Hong Kong secondary listing into a dual primary listing within 2026. Morgan Stanley believes this event could become an additional catalyst beyond non-core asset spin-offs and shareholder returns, especially if it satisfies Stock Connect rules and brings Southbound allocation demand.

Core views

The core view is that the short-term event-driven impact is positive, while the medium- to long-term fundamentals remain cautious. Southbound inclusion and non-core asset spin-offs may support the share price ahead of key events; however, Baidu's core advertising business is recovering only modestly, and rising AI investment in the second half may depress core operating profit, so the stock may remain under pressure over the medium to long term until revenue and earnings stabilize.

Analysis framework

The report analyzes the issue through three angles: first, the timeline for converting from a secondary listing to a dual primary listing on the Hong Kong Stock Exchange and the rules for Stock Connect inclusion; second, the time historically required for similar companies to complete a primary listing conversion; third, the scale of capital flows after major HSTECH constituents were included in Southbound Stock Connect, combined with a sum-of-the-parts valuation framework to assess the target price.

Methodology notes

• Valuation methodssum of the parts

  core business DCF plus value of associate investments

  Under the base-case scenario, the core business is valued at US$123/share using DCF, assuming an 11% discount rate and a 3% perpetual growth rate; associate investments in TCOM and IQ are valued based on implied market value with a 30% discount to investment value, contributing about US$7/share.

• Valuation methodsDCF

  discounted cash flow

  Used to estimate the value of Baidu's core business, with key parameters of an 11% discount rate and a 3% terminal growth rate.

• event studySouthbound capital comparable analysis

  estimate Baidu's potential inflows using capital flows after comparable tech companies were included in Stock Connect

  Technology companies with market capitalizations of about US$40bn-45bn recorded approximately US$3bn-6.8bn in Southbound inflows within 6-12 months after inclusion, equivalent to about 7%-15% Southbound ownership, with inflows usually concentrated in the early stage after inclusion.

• case studyhistorical primary listing conversion cases

  use historical conversion duration to judge Baidu's potential completion window

  Historically, similar companies usually took about 2-6 months to complete a primary listing conversion; if preparations have already been made and requirements are familiar, completion may take about 1-1.5 months.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Baidu Inc (BIDU.O / BIDU US)

  The company covered by the report, rated Equal-weight

  Strengths

  A potential dual primary listing conversion, Southbound Stock Connect inclusion, non-core asset spin-offs, and expectations for dividends and buybacks could all support the share price.

  Weaknesses

  Recovery in the core advertising business is limited, and increased AI investment may weigh on core operating profit in the second half.

  Comparison

  The report uses historical primary listing conversion cases such as Zai Lab, Yum China, NetEase, ZTO, Bilibili, and Alibaba, as well as Southbound ownership experience of HSTECH constituents, as references.

  Risks

  If the conversion timeline is delayed, Southbound capital flows fall short of expectations, AI commercialization disappoints, or the search business is disrupted by AI, the share price may come under pressure.

• IQIYI Inc

  One of Baidu's associate investments and a component of its valuation

  Strengths

  Serves as a source of associate investment value in the sum-of-the-parts valuation.

  Weaknesses

  The report does not separately elaborate on evidence of iQIYI's fundamental improvement.

  Comparison

  Together with TCOM, it is included based on implied market valuation with a discount to investment value.

  Risks

  Fluctuations in the market value of associate investments or a wider discount could affect Baidu's sum-of-the-parts valuation.

• Trip.com Group Ltd (TCOM)

  One of Baidu's associate investments and a component of its valuation

  Strengths

  Serves as a source of associate investment value in the sum-of-the-parts valuation.

  Weaknesses

  The report does not separately elaborate on evidence of Trip.com's fundamental improvement.

  Comparison

  Together with IQ, it is included based on implied market valuation with a discount to investment value.

  Risks

  Fluctuations in the market value of associate investments or a wider discount could affect Baidu's sum-of-the-parts valuation.

Key data

• Stock ratingEqual-weightUnder Morgan Stanley's relative rating system, this indicates that the risk-adjusted total return over the next 12-18 months is expected to be broadly in line with the average level of its coverage universe.
• Target priceUS$130.00In the target price history, the target price on July 14, 2026 was 130.
• Closing priceUS$109.81As of July 20, 2026.
• Target price upside18%Based on the upside/downside of the target price relative to the closing price disclosed in the report table.
• Potential Southbound inclusion date2026-09-07On the premise that a secondary-listed company with a WVR structure completes its primary listing conversion before September 3, 2026.
• Next potential inclusion date2027-03-08If the September 2026 window is not met, the conversion must be completed before March 4, 2027 to qualify for the next window.
• Estimated Southbound capital inflowUS$3bn-6.8bnEstimated for the first 6-12 months after inclusion, equivalent to about 7%-15% Southbound ownership.
• Market capitalizationUS$37,610mnCurrent market capitalization disclosed in the report table.
• 2026e EPSRmb41.06Estimated EPS for fiscal year 2026 disclosed in the report financial table.
• 2026e P/E18.1xEstimated P/E for fiscal year 2026 disclosed in the report financial table.

Impact & implications

For investors, the dual primary listing conversion is more of an event-driven capital-market catalyst than a fundamental turning point in itself. If Southbound inclusion materializes, short-term liquidity and the shareholder structure could improve; however, whether valuation can continue to rerate higher will still depend on the recovery of core advertising, progress in AI commercialization, cost discipline, and the execution of non-core asset spin-offs and shareholder returns.

Risks

• The primary listing conversion fails to catch the September 2026 window, delaying Southbound inclusion to March 2027 or later.
• The recovery in the core advertising business is weaker than expected.
• Increased AI investment in the second half leads to a decline in core operating profit.
• Competition in search and online video intensifies, pushing up traffic acquisition costs and content investment.
• AI-related applications in the China market fall short of expectations.
• AI creates disruption or substitution risk for the search business.

What to watch

• Whether the Hong Kong Stock Exchange primary listing conversion can be completed before September 3, 2026.
• Whether Southbound Stock Connect inclusion will be achieved on September 7, 2026.
• The actual execution pace of non-core asset spin-offs and dividend/buyback arrangements.
• 4Q26 ERNIE foundation model upgrade.
• 4Q26 Baidu World Event.
• Recovery in core advertising revenue, the intensity of AI investment, and changes in core operating profit.