TAL Education Earnings: Margin Recovery Encouraging as New Businesses Scale Up

TAL Education's, or TAL's, fiscal 2024 second-quarter (ending August 2023) revenue was in line, but margin recovery was stronger than expected. Gross margin in the quarter was only 129 basis points lower year on year, a big improvement relative to an 11.1 percentage points contraction year on year in the first quarter. We attribute this to positive operating leverage as the new businesses scale up. We think the margin improvement should be sustainable as growth continues, and hence we raise our gross margin assumptions by 240 to 300 basis points through 2028. Accordingly, we revise our net loss estimate to USD 73 million from USD 113 million in fiscal 2024, and we expect TAL to break even in 2025, one year ahead of our prior forecast. We also lower our cost of capital assumption to 13% from 15.5% to reflect lower exposure to regulatory risk as its business diversifies away from academic tutoring. As a result, we increase our fair value estimate to USD 7 from USD 5.50.