Broker: UOB Kay Hian
Date of Report: Friday, 01 August 2025

TAL Education Group Surges Ahead with AI-Powered Growth: A Comprehensive Q1 FY26 Earnings Analysis and Outlook

Overview: TAL Education Group Delivers Strong Q1 FY26 Results

TAL Education Group, a key provider of K-12 after-school tutoring services in China, has posted a robust set of results for the first quarter of fiscal year 2026. The company’s ongoing evolution, particularly its focus on AI learning devices, is fueling resilient revenue growth and positioning TAL for further expansion in a rapidly transforming education sector.

• Share Price: US\$10.94
• Target Price: US\$14.00 (implying 28% upside)
• Market Cap: US\$6.15 billion
• Shares Outstanding: 462.5 million
• GICS Sector: Communication Services

Key Highlights from Q1 FY26: Outstanding Revenue and Profitability

• Revenue: US\$575 million, up 39% year-over-year, in line with consensus.
• Gross Profit: US\$315 million, up 47% year-over-year; gross margin expanded by 3 percentage points to 55%.
• Non-GAAP Net Profit: US\$42 million, beating consensus estimates of US\$31 million.
• Non-GAAP Net Margin: Unchanged at 7% year-over-year, despite increased marketing efforts for AI learning devices.
• Operating Expenses: US\$301 million, up 30% year-over-year, primarily due to higher sales and marketing.
• Deferred Revenue: Rose 44% year-over-year to US\$967.9 million, indicating strong forward bookings and a promising outlook.

Quarterly Performance Table

Growth Drivers: Learning Devices and Content Solutions

• Learning Services: Continued robust momentum, with small class enrichment programs (Peiyou) achieving an impressive 80% retention rate.
• Content Solutions: Revenue growth sustained by ongoing product improvements and innovations, especially in AI-powered learning devices.
• AI Learning Devices:
  • Focus on enhancing user-device interaction for a more human-like, intuitive experience.
  • Development of real-world practical tools optimized for home learning scenarios.
  • Key user engagement indicators remain solid; average weekly active rate at 80%, and average daily usage per device at one hour.
• Deferred Revenue: 44% year-over-year growth in deferred revenue signals strong future demand.

Margin Performance and Expense Trends

• Gross Margin: Expanded to 55% (up 3 ppt YoY), even with a lower blended ASP due to product mix changes.
• Sales & Marketing: Expenses up 48% YoY to US\$181 million, with the S&M ratio rising to 31% due to increased online channel activities and product visibility campaigns.
• General & Administrative: Expenses rose 10% YoY to US\$121 million, reflecting ongoing investments in product optimization and corporate infrastructure.
• Non-GAAP Net Margin: Stable at 7% despite stepped-up marketing efforts.

Financial Forecasts and Valuation: Solid Growth Trajectory

Key Financials Table

Strategic Initiatives: Innovation, Engagement, and Shareholder Returns

• AI Product Enhancement: TAL is sharpening its focus on AI, specifically by improving the user experience and developing practical, real-world learning tools for home use.
• User Engagement: Average weekly device activity at 80% and daily usage at one hour per device highlight strong user stickiness and engagement.
• Share Repurchases: As of July 30, 2025, TAL has repurchased shares worth US\$477.4 million (0.8% of market cap). The board has authorized a new US\$600 million buyback plan for the next 12 months.

Outlook and Guidance for FY26

• Revenue Growth: Forecasted at 34% for FY26, with Q2 FY26 projected at 35% growth, mainly driven by learning device sales.
• Non-GAAP Net Profit: Revised to US\$97 million for Q2 FY26 and US\$279 million for FY26, yielding net margins of 12% and 9%, respectively.
• Market Dynamics: Company expects continued strong demand, bolstered by national subsidies and successful sales campaigns such as the 618 festival.
• Product Pipeline: Ongoing innovation and optimization in content solutions and AI-powered education technology remain core priorities.

Valuation: Attractive Upside with Strong EPS Growth

• BUY recommendation maintained with a target price of US\$14.00, implying a FY26F PE of 10.3x and a PEG of 0.2x (3-year EPS CAGR of 45%).
• Current Valuation: Shares trade at 8x FY26F PE, presenting compelling value relative to sector growth prospects.
• SOTP (Sum-of-the-Parts) Valuation: Learning services and content solutions valued at a combined US\$8.7 billion (US\$14.00 per share, including net cash).

SOTP Valuation Summary

Risks to Watch

• Margin Pressure: Potential for margin weakness due to ongoing heavy investment in product development and marketing.
• Regulatory Uncertainty: Changes in education policy could impact the business model or product offerings.
• Geopolitical Factors: US-China tensions could affect TAL’s overseas expansion and revenue streams.

Share Price Catalysts

• Rising demand for overseas education
• Further market consolidation in China’s education sector
• Rapid growth in non-academic and enrichment courses
• Increasing market for AI learning machines

Conclusion: TAL Well-Positioned for Ongoing Growth

TAL Education Group’s latest results highlight the company’s effective strategy and its ability to adapt amid shifting regulatory and technological landscapes. With strong fundamentals, accelerating adoption of AI-powered learning devices, and a healthy financial outlook, TAL remains a compelling investment opportunity in the Chinese education sector. Investors should remain mindful of regulatory and geopolitical risks, but the long-term growth trajectory is firmly on track.

Appendix: Key Metrics and Financial Ratios