Introduction: AI’s Transformative Impact on China’s Education Sector

The education landscape in China is undergoing a revolutionary transformation with the widespread adoption of artificial intelligence (AI). The integration of advanced AI models, particularly DeepSeek, has set the stage for a new era of personalized learning, operational efficiency, and monetization opportunities. This report dives deep into the evolving AI-driven education ecosystem, with a focus on key players like TAL Education and New Oriental Education, and explores their strategies, growth forecasts, and market potential.

TAL Education: Leading the AI-driven Revolution

TAL Education has firmly established itself as a trailblazer in the AI-powered education landscape. With the integration of DeepSeek’s advanced AI model, TAL is driving innovation across its product portfolio and enhancing its competitive edge in the market.

Key Initiatives

• MathGPT Integration: TAL has incorporated the Jiuzhang model, its proprietary MathGPT, with DeepSeek to create a dual-engine framework focused on “problem-solving and deep thinking.”
• Sui Shi Wen App: Launched on 15 February 2025, this AI-powered app offers one-on-one tutoring, where users can submit questions through images and receive step-by-step explanations.
• Intelligent Learning Devices: The Xue’ersi brand has introduced the Xbook learning and practice device, priced under Rmb4,000. By leveraging AI technology, these devices have seen an 88% year-on-year (yoy) sales surge in 3QFY25, generating Rmb1.6 billion in revenue and capturing a 28% market share by revenue.

Growth Projections

TAL’s deferred revenue balance rose 62.6% yoy to US\$825.6 million in 3QFY25, reflecting a strong growth outlook. The company guided FY25 revenue to rise 34-40% yoy, reaching Rmb14.3 billion to Rmb14.9 billion. Despite challenges in profitability from learning content solutions and AI investments, TAL’s revenue is forecasted to grow 32% yoy in FY26.

Recommendation

UOB Kay Hian maintains a BUY rating on TAL Education with a target price of US\$18.00. The company’s focus on AI integration and product innovation positions it as a top pick in the sector.

New Oriental Education: Stable Growth with AI-Driven Solutions

New Oriental Education continues to leverage its strong foundation and strategic adaptations to thrive in the competitive education sector. The company’s integration of AI solutions reflects its commitment to innovation and scalability.

Key Strategies

• Focus on K-9 and High School Segments: The K-9 segment is expected to grow 40% yoy, and the high school segment is forecasted to rise by 20% yoy in 3QFY25.
• Consumer Education Smart Hardware: New Oriental plans to capitalize on the growing Rmb76.3 billion market for smart hardware by 2027.
• Subscription-Based Software: The company is shifting towards subscription models for AI-enhanced Q&A services and courses, aligning with global trends.

Growth Projections

The company forecasts 3QFY25 revenue to rise by 18-21% yoy, reaching US\$1.007 billion to US\$1.032 billion. Full-year FY25 top-line growth is expected to remain solid at 25% yoy, with core revenue (excluding East Buy) growing 27% yoy to US\$4.9 billion in FY25.

Recommendation

UOB Kay Hian maintains a BUY rating on New Oriental Education with a target price of US\$66.00. The company is poised for multi-year scale and profit expansion in a relatively stable policy environment.

Other Key Players in the Education Sector

East Buy

East Buy, with a market capitalization of Rmb14.5 billion, is leveraging its dominant position in the AI-driven education sector. The company is trading at 59.6x 2025 calendarized PE and has shown strong growth potential.

Gaotu Techedu

Gaotu Techedu remains a smaller player with a market cap of US\$797 million. Although specific profitability metrics are unavailable, its low valuation makes it a potential target for long-term investors.

Youdao

Youdao, with a market cap of US\$1.168 billion, is focusing on AI integration to enhance its product offerings. However, the company is facing challenges, reflected in its high valuation of 57.1x 2025 PE and negative ROE.

Duolingo

Duolingo leads the global online education market with a market cap of US\$18.9 billion. Trading at 147.7x 2025 PE, it remains a premium investment option, driven by its innovative language-learning platform.

China Beststudy

China Beststudy, with a market cap of Rmb2.98 billion, stands out with a low 2025 PE of 9.2x and a focus on delivering value-driven education solutions.

Scholar Education

Scholar Education, valued at Rmb1.887 billion, boasts a 2025 PE of 7.3x, making it an attractive option for value investors. The company is well-positioned to capitalize on growth opportunities in lower-tier cities.

Sector Catalysts and Risks

Catalysts

• Supportive governmental policies in the private higher education segment.
• Market consolidation benefiting larger players.
• Increasing penetration in lower-tier cities.

Risks

• Slow registration of profit and non-profit private high schools.
• Potential unfavorable regulatory policies.

Conclusion

The integration of AI into China’s education sector is unlocking unprecedented opportunities for growth and innovation. TAL Education and New Oriental Education are at the forefront of this transformation, leveraging AI to enhance their product offerings and operational efficiency. With strong growth forecasts and favorable market dynamics, these companies represent compelling investment opportunities in the evolving education landscape.