Introduction to TAL Education Group

TAL Education Group is a prominent provider of K-12 after-school tutoring services in China. Operating under well-recognized brands such as Peiyou and Xueersi.com, TAL has consistently aimed to deliver comprehensive educational solutions for students across the country. As a leader in the communication services sector, TAL’s performance has been under the spotlight, and its recent earnings report offers valuable insights into its progress and future potential.

Key Financial Highlights for 3QFY25

The company reported a robust 62% year-on-year (YoY) surge in revenue, reaching \$606 million for the third quarter of FY25. This figure surpassed both UOB Kay Hian’s and consensus estimates by 12-14%. However, the gross margin showed a slight decline of 1 percentage point YoY, settling at 53%, primarily due to the launch of lower-priced AI learning devices.

Non-GAAP net profit stood at \$39 million, significantly beating the consensus estimate of \$20 million. This translates to a non-GAAP net margin of 6%, marking a notable 7-percentage-point improvement from the previous year, signaling a strong profit turnaround amid ongoing investments in learning devices.

Detailed Financial Performance Analysis

Revenue Growth

TAL’s revenue momentum accelerated, with a 62% YoY growth in 3QFY25, up from 50% in the previous quarter. This growth was largely driven by Peiyou’s continued revenue expansion and the impressive sales of AI-powered learning devices during the 11.11 campaign, supported by national subsidies. However, the company expects a sequential revenue decline in learning devices for 4QFY25 due to seasonal factors.

Profit Margins

Despite a narrowing gross margin (53%, down 1 percentage point YoY), TAL demonstrated improved operational efficiency and cost control. Sales and marketing expenses rose by 86% YoY to \$226 million, while general and administrative expenses saw a modest 1% YoY increase to \$112 million. Non-GAAP net profit for the quarter was \$39 million, with an expanded non-GAAP net margin of 6%, reflecting effective cost management amid strategic investments.

Deferred Revenue

The company’s deferred revenue balance reached \$825.6 million in 3QFY25, up 62.6% YoY. This indicates a promising outlook for FY25/26, as TAL continues to capitalize on favorable consumer trends and government support.

Strategic Initiatives and Market Position

AI-Powered Learning Devices

In late August 2024, TAL introduced the Xbook, a learning device tailored for practice-focused education. The device showed promising results, with an 80% average weekly active rate and daily usage averaging one hour per device. Over half of the active users engaged with the device for five or more days weekly.

TAL also upgraded its Xpad series, adding features like split-screen functionality and improved Precision Learning Pro services. The Xpad received the prestigious TWICE Picks award at the 2025 Consumer Electronics Show, further cementing its market reputation.

Enrichment Services and Capacity Expansion

TAL expanded its premium enrichment programs to cater to a broader user base, both offline and online. The company resumed rapid capacity expansion, introducing new programs and delivering diverse learning formats, including recorded classes alongside dual-teacher live streaming models.

Competitive Landscape

The demand for learning devices remained resilient in December 2024, boosted by the 12.12 shopping festival and national subsidies. TAL’s Xueersi brand captured a 19% market share in sales volume, ranking second behind Zuoyebang (33%), and led in revenue share at 28%, ahead of competitors like Zuoyebang (25%) and iFlytek (13%).

Earnings Forecast and Risks

TAL’s 4QFY25/FY26 revenue forecasts remain largely unchanged, with expected growth rates of 39% and 30%, respectively. Non-GAAP net profit forecasts have been revised upward to \$62 million for 4QFY25 and \$295 million for FY26, translating to net margins of 10% and 11%, respectively.

Potential risks include margin pressures from heavy investments, policy uncertainties, and US-China tensions affecting overseas operations.

Valuation and Recommendation

UOB Kay Hian maintains a BUY recommendation for TAL Education Group, with a target price of \$14.00. This valuation is based on a sum-of-the-parts (SOTP) approach, implying a 10x FY26F PE and 0.2x PEG against a three-year EPS CAGR of 63%. The current trading valuation of 6x FY26F PE underscores significant upside potential, driven by improved earnings visibility and reduced losses from AI investments.

Share Price Catalysts

• Increased demand for overseas education.
• Further market consolidation.
• Rapid growth in non-academic courses.
• Rising demand for AI-powered learning devices.