China's education sector revives from the regulatory overhaul; What drives the surge of EDU and TAL in 2023?

What you need to know about TAL Education Group's 60% surge year-to-date

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In 2021, China's education sector faced a monumental shift following stringent regulatory changes. In July 2021, the Chinese government issued a "Double Reduction" policy, which banned all after-school tutoring for students enrolled in primary and middle school (typically 6-15 years old) in core subjects such as Math, Chinese, and English. This overhaul aimed at reducing academic pressure on students, but it also sent shockwaves through the industry. The drastic move wiped out almost all of the market capitalization of industry leaders in the Education industry, such as New Oriental Education (NYSE: EDU) and TAL Education Group (NYSE: TAL), following a regulatory change in July 2021.

The comeback of China's education industry in 2023

Despite the initial downturn, the education industry is experiencing a significant recovery. Year-to-date in 2023, industry leaders EDU have achieved a return of over 138%, while TAL has seen a return of over 60%, despite the prevailing negative sentiments towards Chinese equities.

2023 Year-to-date return of EDU and TAL

Recruitment numbers in the education industry, which previously took a hit and affected tens of millions of employed people, have started to bounce back. The year-on-year growth of the total number of job postings for the education industry turned positive in early 2023. Since then, it has been recovering at a faster pace compared to the overall job market.

Notably, New Oriental Education (EDU) successfully navigated these challenges by diversifying into e-commerce through its e-commerce arm "East Buy," in addition to its traditional educational offerings.

Dong Yuhui, a former English tutor at New Oriental, played a pivotal role in helping the company, particularly its online training arm Koolearn Technology, transition into the e-commerce sector, known as East Buy. Since the halt of private tutoring in 2021, Dong Yuhui became an internet sensation overnight in June 2022 following a viral live-streaming session on Douyin, where he used English phrases and poetry to promote various products. His unique approach to e-commerce not only made him a star but also significantly boosted Koolearn's share price, demonstrating the successful pivot of the company from traditional education to e-commerce. Koolearn Technology Holding Limited, which was once the ambition of New Oriental to enter the online education arena, was officially renamed "East Buy Holding Limited" in early 2023.

East Buy has established the brand to assist farmers in selling their agricultural products directly from the source.

Without an e-commerce arm, TAL Education Group, another industry stalwart, has gone all-in on education and shifted its focus to the "Suzhi" education track. In the Chinese language, “Suzhi” education, which loosely translates to “caliber education”, refers to non-academic tutoring classes that prioritize improving the overall caliber of students rather than solely focusing on achieving higher scores.

Academic tutoring classes have long been criticized for creating extra burdens for students and parents, and there has been a call for a more well-rounded approach to quality education in China. However, in China, the college admission system known as "Gaokao" determines selection solely based on exam scores, so "Suzhi" education classes have remained somewhat “discretionary” for students and parents.

In Fiscal year 23Q3~24Q2 (that’s fall 2022 to summer 2023), "Suzhi" education classes accounted for an average of 60% of TAL's entire revenue, while the remaining revenue came from academic tutoring classes for high school students (which were not banned by the government). As TAL shifts its strategic focus towards the "Suzhi" classes, there are concerns about the sustainability of TAL's growth and whether the demand for these somewhat “discretionary” classes can meet investors' expectations of TAL's future growth potential.

Since the regulatory changes, TAL has pioneered offering "Suzhi Education" classes specifically designed for primary and middle school students. The course series consists of four tracks: Innovation thinking, Literature & Writing, Programming & Robotics, and Science experiments. TAL believes that these courses focus on the essential skills and qualities that students need to succeed in the future.

Data source: TAL; data collected and curated by BigOne Lab

The "Innovation Thinking" course series has become the best-selling Suzhi education course as of the 2023 Fall semester. The course syllabus covers topics that are very applicable in real-world scenarios. For example, in a second-grade Innovation Thinking class (around age 7), students learn about "market research" to develop their analytical skills. This involves conducting research on product sales in supermarkets and understanding sales strategies for product combinations. Additionally, there are classes like "The Art of Purchasing" that teach students how to analyze merchants' varying costs for the same item and allocate total costs, thereby enhancing their data processing abilities.

A deep dive into TAL's course enrollment data reveals some interesting insights into how Chinese perceive what makes a good "caliber" education and how the priorities of different aspects vary across different regions. Read our previous stories to discover if you are interested in learning more about how Chinese are thinking differently about the future of education and what kind of education makes lifelong success possible for their children.

Evolving perceptions of education in China

Chinese society's attitude towards education is undergoing a significant transformation. The traditional emphasis on rote learning, often criticized as "卷Juan" culture, is being questioned. The term "卷 Juan" refers to a culture where individuals feel pressured to constantly work harder and outperform others, often to an excessive or unhealthy degree.

Recently, a picture went viral on WeChat. During this winter's flu season, pediatric hospitals were overcrowded, but many kids were multitasking, receiving intravenous fluids while doing their homework. Many young parents are reacting and commenting that "my kids do not need to be number one and nothing is more important than their happiness and health." Some parents are saying, "The anxiety and competitive mentality actually come from the parents, not the children, and we need to accept who they are, just like our children never ask the parents for excellence.”

Photo credit: https://mp.weixin.qq.com/s/nPWIw455BB2uuAca0IYs1Q

There is also a growing appreciation for "innovative thinking" as more Chinese people recognize that today's world is not solely dependent on mastering a single skill (which could soon be replaced by AI anyway), but also on creativity, mental and physical well-being.

However, the shift towards Suzhi education has sparked controversy. There are ongoing debates about whether "Suzhi education" is accessible to all socioeconomic classes, and doubts persist regarding its effectiveness compared to traditional exam-focused education. Some argue that "Suzhi" education considers expensive activities like horse riding and overseas experiences as indicators of "quality" education, while activities like playing football or jumping rope are not valued. Instead of focusing on developing a person's worldview, values, and core character, many "Suzhi" education classes, for instance, favor the wealthy and create extraordinary experiences and adventurous backgrounds that can give the rich an advantage when applying to prestigious universities abroad.

TAL Education Group’s recent performance

Despite the challenges brought about by sudden regulatory changes, TAL Group has shown resilience. The stock price of TAL has soared more than 60% year-to-date in 2023, despite the overall passive sentiments towards Chinese equities. The ever-evolving perceptions of education by young parents in China have certainly created a premise for the long-term developments of the Suzhi education market.

In the following paid section, we will provide the latest performance information of TAL for investors who are interested in examining TAL more closely before its next earnings. Our tracked revenue consistently aligns with the official trend reported by TAL's education group and historically represents 65% to 68% of Peiyou's (TAL's offline educational service) revenue.

Note: 1) We assume that the revenue of Peiyou = tuition fee / 1.06; 2) the educational service tracked by BigOne Lab does not include digital educational solutions

The paid section will provide important performance metrics of TAL. This includes the tuition generated from course registrations in fall 2023, the growth of learning centers nationwide, and the sales of TAL's digital learning devices through major online channels such as Tmall, JD, Douyin, and Kuaishou.

Disclaimer: This article is not sponsored by TAL Education Group or any other companies mentioned in the article.

Performance of TAL's core offline educational service - Peiyou

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