Report Interpretation

Overview

This China education earnings preview assesses New Oriental Education & Technology (EDU/9901.HK) and TAL Education Group ahead of their upcoming results. Goldman Sachs stays constructive on both, arguing that resilient demand, margin expansion and reasonable valuations outweigh near-term growth and product-cycle pressures.

Core views

Goldman Sachs argues that EDU and TAL offer defensive growth in a soft, deflationary macro environment. It cites fragmented education markets, easing competitive pressure and high visibility for medium-term revenue and operating-profit growth. The report also says available data point to relatively low exposure to investor concerns over individual income tax on certain offshore-trust assets and related income or dividend gains. Education was lifted to third place in Goldman Sachs’ internet-vertical preference ranking, behind games/entertainment and cloud/data centers. For the August quarter, Goldman Sachs expects revenue growth to converge for the first time in three years: EDU is forecast to grow 23% year on year, broadly matching the prior May quarter, while TAL is forecast to grow 22%, moderating from 32% previously, both in US-dollar terms. The institution views this convergence as temporary and expects TAL to regain the faster medium-term trajectory, modelling FY26-29E revenue CAGRs of 17% for TAL and 12% for EDU. Its EDU August-quarter revenue estimate is 2% above Visible Alpha consensus, while its TAL estimate is 2% below consensus. TAL’s near-term moderation is attributed chiefly to content solutions, forecast to grow 6% year on year versus 26% in the May quarter. Learning-tablet billings are expected to fall 12%, reflecting a 30% volume decline partly offset by a 26% ASP increase. Learning services and other revenue is nevertheless expected to remain strong at 21% growth. Goldman Sachs expects the pressure in content solutions to ease gradually as ASPs rise. For EDU, the report expects East Buy revenue to rise 80% year on year, while core-business revenue grows 10%; it expects East Buy growth to normalize as comparisons become more demanding. Profitability is the central near-term catalyst. Goldman Sachs models non-GAAP operating-margin expansion of 0.7 percentage points for EDU and 5.7 percentage points for TAL, producing expected non-GAAP operating-profit growth of 27% and 78%, respectively. It attributes the expansion to disciplined learning-center rollout, AI-enabled efficiency gains and selling-and-marketing cost control. Investors are specifically directed to follow repurchase execution, AI-enabled content products and management’s balance between profit expansion and revenue growth. For EDU, Goldman Sachs raises FY27-FY29 revenue forecasts by 1%-2% and non-GAAP operating-profit forecasts by 2%-3%, principally because of stronger-than-expected East Buy profitability. It forecasts FY27 revenue of US$6.7 billion, up 18% year on year in US dollars and 14% in renminbi, with group margin expanding 1.1 percentage points to 14.1%. Expected segment growth in renminbi terms is 16% for K-9 initiatives, 13% for high school, 14% for PRC test preparation and flat growth for overseas test preparation. The report expects an August-quarter beat and sees AI-content progress and cost control as important to the result. For TAL, Goldman Sachs leaves FY27-29 revenue broadly unchanged but raises non-GAAP operating-profit estimates by 1%-4% on higher projected gross margin. It forecasts 2QFY27 revenue of US$1,051 million, up 22% year on year in US dollars or 16% on constant currency, and non-GAAP operating profit of US$192 million at an 18.3% margin. Learning services are projected to grow 22% and content solutions 6% on constant currency. TAL’s expected non-GAAP net income is only US$1 million because the model includes a fair-value loss on its Zhipu AI stake. For FY27, the institution projects learning-services growth of 21% and content-solutions growth of 19% on constant currency, while learning-tablet billings decline 2% as a 17% shipment decline is offset by a 19% ASP increase. Tracker data reinforce the volume risk: tablet GMV on major e-commerce platforms fell 17% year on year in 2QFY27 and volume fell 37%. Valuation is based on sum-of-the-parts EV/NOPAT frameworks plus net cash and a 10% holding-company discount. EDU’s updated 12-month ADR target is US$71, up from US$70, while its H-share target remains HK$55. The valuation uses 13x EV/NOPAT for high-school tutoring, 12x for other traditional businesses and new initiatives, the attributable value of East Buy, US$3.4 billion of net cash excluding deferred revenue, and the holdco discount. TAL’s target rises to US$16.1 from US$15.9, using 13x EV/NOPAT for high-school tutoring, 15x for enrichment learning and other services, 13x for content solutions assuming a normalized 5% operating margin, US$1.9 billion of net cash excluding deferred revenue, and a 10% holdco discount. Goldman Sachs sees TAL’s risk-reward as favourable because of growth, improving profitability, investments that may strengthen longer-term competitiveness, net cash and buyback support; it describes EDU as a resilient growth story with valuation support and scope for consensus EPS upgrades from cost optimization.

Analysis framework

Goldman Sachs compares upcoming revenue growth, segment trends and margin expectations with prior quarters and consensus estimates, then links operating assumptions to valuation. It uses company data and external trackers for demand indicators, forecasts segment-level revenue and profitability, and values each company through a sum-of-the-parts EV/NOPAT approach adjusted for net cash and a holding-company discount.

Methodology notes

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation using segment-specific EV/NOPAT multiples, net cash and a holding-company discount.

  The report values education segments separately, adds attributable investments and net cash, and subtracts a 10% holding-company discount to derive 12-month target prices for EDU and TAL.

• Industry AnalysisVolume-price decomposition

  Learning-tablet revenue and billings are analysed through shipment volume and average selling price changes.

  For TAL, declining tablet volumes are assessed alongside rising ASPs to explain billings, content-solutions growth and the expected path of margin recovery.

Asset mapping & comparison

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

• New Oriental Education & Technology (EDU / 09901.HK)

  Covered company; Goldman Sachs maintains a Buy rating and expects a 1QFY27 beat.

  Strengths

  Diversified educational-services exposure, expected margin expansion, stronger East Buy contribution, valuation support and potential EPS upgrades from cost optimization.

  Weaknesses

  Core-business revenue is forecast to grow 10% in the August quarter, below East Buy’s expected growth.

  Comparison

  Goldman Sachs expects EDU’s 12% FY26-29E revenue CAGR to trail TAL’s expected 17% CAGR, though EDU is presented as a resilient and balanced growth story.

  Risks

  Shrinking demographics, competitive pricing pressure, disruption to overseas-study demand, AI disruption, weaker operating efficiency or margin improvement, and regulatory changes.

• TAL Education Group (TAL)

  Covered company; Goldman Sachs maintains a Buy rating and expects continued profit expansion.

  Strengths

  Competitive content and technology, rapid capacity expansion from a low base, revitalized Peiyou business, learning-services growth, net cash and buyback support.

  Weaknesses

  Content-solutions deceleration, tablet shipment declines and mid-term operating losses from investments in hardware, AI and overseas expansion.

  Comparison

  Goldman Sachs expects TAL’s revenue growth to outpace EDU in the medium term, forecasting a 17% FY26-29E revenue CAGR versus 12% for EDU.

  Risks

  Weaker offline capacity expansion, education-sector regulatory changes, an unsatisfactory smart-tablet launch and challenges in overseas expansion.

Key data

• EDU August-quarter revenue growth forecast+23% yoyUS-dollar terms; Goldman Sachs is 2% above Visible Alpha consensus.
• TAL August-quarter revenue growth forecast+22% yoyUS-dollar terms, down from +32% yoy in the May quarter; 2% below consensus.
• EDU August-quarter non-GAAP operating margin22.6%+0.7 percentage points year on year.
• TAL 2QFY27E non-GAAP operating margin18.3%+5.7 percentage points year on year; non-GAAP operating profit forecast at US$192 million.
• EDU FY27E revenueUS$6.7 billion+18% yoy in US dollars and +14% yoy in renminbi.
• TAL 2QFY27E revenueUS$1,051 million+22% yoy in US dollars or +16% yoy on constant currency.
• EDU 12-month target priceUS$71 per ADR / HK$55 per H-shareADR target raised from US$70; H-share target unchanged.
• TAL 12-month target priceUS$16.1Raised from US$15.9.

Impact & implications

The report expects margin improvement to be the main earnings driver for both companies, supported by disciplined expansion, AI-related efficiency and expense control. It views TAL’s tablet and content-solutions weakness as a manageable near-term drag rather than a change to its medium-term growth case, while EDU’s updated estimates reflect stronger East Buy profitability.

Risks

• For TAL: weaker-than-expected offline capacity expansion, education-sector regulatory changes, an unsatisfactory smart-learning-tablet launch and difficulty expanding overseas.
• For EDU: pressure from shrinking demographics, competition-driven pricing pressure or a more discretionary consumer profile, disruption to overseas-study demand, AI disruption, weaker-than-expected operating efficiency or margin improvement, and regulatory changes.

What to watch

• Execution of EDU’s up-to-US$200 million FY27 share-repurchase quota and TAL’s approach to more systematic buybacks, with about US$400 million of its FY27 quota remaining.
• Progress of AI-enabled content solutions, including EDU’s Swipe & Learn and SureChinese applications and TAL’s T6 learning tablets.
• Management’s ability to balance margin expansion with revenue growth.
• TAL learning-tablet shipment, GMV and ASP trends, and the pace of recovery in content solutions.