好未来

TAL Education's first-quarter fiscal 2027 (ending February) revenue grew 32% year on year, while adjusted operating margin expanded 15.6 percentage points to 18.1%, driven primarily by a lower expense ratio.

Why it matters: This marks the third consecutive quarter of margin expansion exceeding 10 percentage points year on year, reinforcing our view that TAL has adopted a more balanced approach to growth and profitability. Operating expense ratio fell by 12.8 percentage points, with improvements across both selling and administrative expense ratios. We believe TAL scaled back marketing spending for its learning tablets and online education platform, as reflected in the 5% decline in selling expenses. We raise our operating margin forecast by 2.1 percentage points on average for fiscal 2027-31, primarily reflecting more disciplined spending. However, sales and marketing remain important growth drivers. We therefore forecast selling expenses to rise by an average of 12% annually over the period.

The bottom line: We raise our fair value estimate by 11% to USD 14.60 for no-moat TAL Education, following 16%-30% upward revisions to our operating profit forecasts for fiscal 2027-31, reflecting a stronger margin outlook. We view the shares as fairly valued currently. TAL extended its share repurchase program through July 2027. The company may repurchase up to USD 394 million of common shares, equivalent to about 5.7% of shares outstanding. We view this as a positive sign of management confidence.

Between the lines: We believe offline tutoring benefited from higher utilization, similar to trends at New Oriental, as competition in China's tutoring market eases. Ongoing refinement of course offerings and operational improvements likely also supported utilization and profitability.

Our discounted cash flow-based fair value estimate is USD 14.60 per share.

We forecast revenue to grow at a 13% CAGR over the next five years and surpass the fiscal 2022 level by fiscal 2029. The growth would be driven by both learning services and content solutions segments. We expect the growth in learning services to be supported by learning center expansions. Meanwhile, we expect TAL Education to leverage its broad content library and strong content development capacity to grow its content solutions business.

We anticipate gross margin to remain stable at 55%-56% through fiscal 2031. Meanwhile, we project the operating expense ratio to decrease to 43% from 46%, reflecting positive operating leverage and underpinning our 12.1% midcycle operating margin forecast.

We estimate a 20% return on new invested capital and 7% annual growth in earnings before interest in our five-year stage-two period. Our weighted average cost of capital is 13%, the same as the cost of equity, as TAL Education has no debt.

We do not think TAL Education has a moat.

TAL used to be the market leader in after-school tutoring. Following the regulatory change in 2021, TAL spun off its K-9 academic after-school tutoring business. It focuses on enrichment learning and content solutions now.

Enrichment learning offers nonacademic tutoring on science and creativity, coding and programming, humanities and aesthetics, and other programs. The market is highly fragmented. Demand is not as sticky as academic tutoring. We think it is difficult to develop a moat in this business.

In content solutions, TAL offers educational content to individual learners through learning devices. We acknowledge that TAL Education is a leader in learning content, but we do not see anything that cannot be replicated by competitors. TAL's learning tablet gained strong growth momentum after being launched in early 2023. However, the learning hardware business is highly competitive with a low entry barrier. We do not think TAL can build a moat on this front.

The learning tablet business grows faster than expected, driven by successful product launches.

High brand recognition among students accelerates the time to profitability for the learning tablet business.

TAL leverages AI technology to lower the cost of producing learning content, driving gross margins above expectations.

Growth momentum decelerates faster than anticipated as TAL scales back marketing activities.

Intensifying competition drives operating margins below expectations.

Elevated memory costs weigh on learning tablet profitability.