TAL Education Stock: A Mixed Outlook (NYSE:TAL) – Seeking Alpha | Team Cansler

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I assign TAL Education (NYSE:TAL) Shares. In the company’s media releases, TAL Education describes itself as “an intelligent learning solution provider in China” that provides “comprehensive learning services for Pupils of all ages through varied teaching formats.”

In my opinion, TAL deserves a Hold rating as I see mixed prospects for the company. On the one hand, TAL has successfully transitioned into new business areas within education such as content solutions and learning technology solutions, and there is significant growth potential in relation to its new live streaming e-commerce business. On the other hand, TAL’s near-term profitability could be negatively impacted by the need to invest in new growth areas, and the company remains exposed to regulatory risks associated with its other education businesses.

Live streaming ecommerce store

A research report dated October 14, 2022 (not publicly available) titled “Getting Started with Live Trading Offers Another Option”, published by Securities from Chinese dealers noted that TAL Education recently launched a new live streaming e-commerce business. The report highlighted that TAL “is leveraging its teaching content” by creating a “new channel in Douyin (the Chinese version of Tik Tok) known as “Xue Jia You Pi” that will have a daily GMV (Gross Merchandise Value ) of around 10,000 RMB between August and mid-October 2022.

As an indication of the growth potential of TAL Education’s new live-streaming e-commerce business and how that could impact TAL’s future stock price performance, it’s worth examining what’s going on with one of TAL Education’s competitors, Koolearn Technology Holding Limited (OTCPK:KLTHF) happened. [1797:HK]. Year-to-date in 2022, Hong Kong-listed Koolearn shares are up +656% according to price data from S&P Capital IQ.

An earlier July 14, 2022 I’m looking for alpha news Article cited research from hedge eye He mentioned that “Koolearn remains in hype mode and everyone is talking about his new live streaming growth opportunity with his platform” known as “Oriental Selection”. It’s clear that Koolearn’s foray into the live-streaming e-commerce space has been the catalyst for its stunning stock price performance so far this year.

Therefore, it is reasonable to assume that there is significant upside potential for TAL Education shares if TAL’s new live streaming e-commerce business, dubbed “Xue Jia You Pi,” becomes as successful in the future as ” Oriental Selection”.

Especially the Securities from Chinese dealers The report I referenced earlier found that the first 50-day GMV for TAL Education’s new live-streaming e-commerce business is under 10% of what Koolearn’s “Oriental Selection” achieved, when it was first put on the market. Therefore, TAL Education’s “Xue Jia You Pi” didn’t have the explosive start that “Oriental Selection” did, but there is also plenty of room for improvement and an opportunity for “Xue Jia You Pi” to catch up in the future.

Successful shoot

Chinese education companies as a group have been hit hard by regulatory headwinds such as “China’s ban on for-profit private tutoring in July 2021,” as highlighted in media releases South China tomorrow post. TAL Education is no exception as its revenue declined -80% year-on-year from $1,444 million in Q2 FY23 (YE February 28) to $294 million in Q2 FY23 as in the most recent quarterly results press release.

On November 13, 2021, I’m looking for alpha news mentioned that TAL “plans to stop offering academic subjects for students from kindergarten through ninth grade (K-9 Business) in mainland China by the end of December 2021.” In fact, TAL Education lost at the operating income level for seven quarters between fiscal 3rd quarter of fiscal 2021 and fiscal first quarter of 2023 S&P Capital IQ’s financial data.

But TAL Education has successfully moved away from its legacy K-9 business, which has been negatively impacted by changes in China’s education industry regulations. Notably, TAL reported positive non-GAAP operating income of $40.5 million for the final Q2 of fiscal 2023. In other words, TAL has become a profitable business (at the operating income level) again, despite losing a large chunk of its revenue from the old K-9 business.

At the company’s Q2 FY 2023 earnings review, TAL Education emphasized that “we continue to transform our business into a smart learning solutions provider,” and attributed its operating profitability last quarter to new “business growth” such as “seasonal fluctuations” and, among other factors “Cost Optimization Measures”. To illustrate, TAL’s focus on new business areas has paid off as the revenue contribution from Content Solutions and Learning Technology Solutions (new companies launched since FY2023) combined increased from 0% in FY2022 to 25% in Q2 FY2023.

Good results for Q2 FY 2023 are not sustainable

Unfortunately, TAL Education’s decent financial performance (it turned positive from operations for the first time in almost two years) is unlikely to be sustainable for the second quarter of fiscal 2023.

The consensus financial forecasts of the market for TAL acc S&P Capital IQ Data suggests that the company’s Q3 FY2023 revenue shrank -15% qoq. The company also stated at its Q2 FY2023 Investor Conference that “Our best estimate is that the level of profitability next quarter (Q3 FY2023) is likely to be lower than this quarter (Q2 FY2023). “

TAL Education’s learning services business tends to see higher revenue for Q2 and Q4 (fiscal-wise) due to seasonality, so TAL revenue in Q3 FY2023 will not be as good as in Q2 FY2023.

A key theme is that TAL must continue to invest in future growth as part of its focus on new businesses. This of course leads to lower profitability for TAL Education in the short term. TAL Education admitted at its most recent quarterly earnings review that it “will continue to invest in new initiatives over the coming quarters.”

Regulatory headwinds are not abating

As I mentioned earlier in this article, new regulations caused TAL Education to pull out of its old K-9 education business. Looking ahead, TAL’s other education-related businesses aren’t necessarily immune to future regulatory headwinds.

A new November 9, 2022 I’m looking for alpha news The article highlighted that China’s “Vice Premier Sun Chunlan” published an “opinion article” stating that “a conscientious (education) industry cannot become a profit-making industry.”

Therefore, there is good reason to worry that most education companies in China, including TAL Education, will find it difficult to charge reasonably high prices and make a significant profit from education-related services and products in the future.

bottom line

I think the outlook for TAL Education is mixed, which justifies my Hold rating on TAL. TAL Education reported positive operating income for the second quarter of fiscal 2023, but continued investments will weigh on the company’s profitability in the near term. In the medium to long term, regulatory risks remain a key concern for TAL.

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