Steep loss mars TAL Education’s comeback

A $47.4 million expense in its latest fiscal quarter may be linked to the educator’s 2025 acquisition of a bankrupt U.S. company

Key Takeaways:

• TAL Education’s net revenues increased by 15.5% to $994.6 million in its latest fiscal quarter, but it fell into the red with a $47.4 million loss
• Most of the loss came from a $189.7 million expense related to changes in the fair value of company investments

By Edith Terry

It’s been a long, tough slog for TAL Education Group (TAL.US) since the erasure of 80% of its business by China’s regulatory overhaul of the $100 billion K-12 after-school tutoring industry in 2021. Before that, the company’s top and bottom lines were growing at double-digit rates, even as it and longtime rival New Oriental Education (EDU.US; 9901.HK) faced intensifying competition from a cohort of aggressive startups.

Fast forward to TAL’s fiscal year ended Feb. 28, 2025, when it turned a profit for the first time in five years, paving the way for a $530 million profit in its latest year through February 2026. But the string of profits turned to red ink in its latest quarter, through Aug. 31, with a loss of $47.4 million, reversing a profit of $124.1 million a year earlier, according to the company’s latest financial report released last week.

The wide profit swing in the latest quarter appears to cast doubt on TAL’s comeback. But closer examination suggests the drop into the red was driven by changes in the fair value of certain company investments – the same factor that lifted the company to remarkable profit growth in the previous quarter. Only this time the fair value changes were negative, compared to a big positive gain in the previous quarter.

TAL reported an expense of $189.7 million in its “other income” item during its latest fiscal quarter, compared with a gain of $405.2 million for that item in the previous quarter. On its earnings call after the latest results, deputy CFO Jackson Ding said that TAL maintained “an investment portfolio that includes a variety of investment products,” adding that “the fair value of certain investments declined.”

TAL’s shares fell by nearly 3% the next day, though they recouped most of that the day after that, indicating investors weren’t too fazed by the sudden swing to the red. The changes in fair value investments over the last two quarters could well be related to TAL’s June 2025 purchase of bankrupt Epic! Creations, a digital subscription-based learning platform and library headquartered in California.

Epic was in bankruptcy proceedings after its $500 million acquisition by edtech firm Byju in 2021. If Epic was indeed behind TAL’s swing into the red, the second quarter downturn could represent a one-off occurrence, similar to the big profit jump the previous quarter.

Expanding core business

Outside its mysteriously gyrating fair value expenses and gains, there was some good news in TAL’s latest quarterly results regarding its core education business. Its quarterly revenue rose 15.5% year-on-year to $994.6 million, while its income from operations grew by 145.4% to $235.9 million, and its gross margin improved by 2.8 percentage points to 59.8%.

TAL has two main revenue streams. The larger of those is its learning services, with 1,800 teachers in 602 learning centers across China, which generated $1.9 billion in revenue in its 2026 fiscal year. These provide specialized classes and about two-thirds of its revenue. The other stream is learning solutions, which includes learning devices and course content, and generated $1 billion in its fiscal 2026, accounting for the other third. Learning services revenue grew 27% last year, while learning content rose 48%.

TAL didn’t provide details on those two categories in its latest report, although President and CFO Peng Zhuangzhuang said the retention rate for enrichment courses was over 80%, and that heavy competition was “weighing on” the performance of its learning device business.

The latest quarter’s 15.5% revenue growth was about half the 33.7% growth the company reported for all of its 2026 fiscal year. But without more detail from the company on its two main segments, it’s hard to predict the rest of the year.

That said, one thing that’s clear is that China’s private education industry has made a significant comeback from its near-death experience five years ago. Out of 19 domestic education companies, 12 have achieved “continuous revenue growth” for the three years between 2023 and 2025, according to data from Tonghuashun. TAL is not included in that group, since its revenue fell 76.8% in its 2023 fiscal year shortly after the crackdown.

Different strategies

TAL and New Oriental, two of China’s oldest players in the space, have used different strategies to survive. But the ability of both to rebound reflects the enduring strengths of China’s private education sector, which is based on the culture’s deep respect for education as a primary driver of upward mobility.

New Oriental also released results last week for its fiscal first quarter through August. It outperformed TAL with a 23.1% revenue increase to $1.87 billion and a 13.5% increase in net income to $273.2 million. The company used a novel strategy after the crackdown to restructure its former online education arm, now called East Buy (1797.HK), by using its teachers to promote a new e-commerce network. That business has now left the education field entirely, and is purely an e-commerce company, though it’s still included in New Oriental’s financial reports.

East Buy’s growth was a major factor in New Oriental’s latest quarterly gains, as the unit expanded its private label portfolio of products to 1,000 stock picking units (SPUs) and opened four offline experience stores with “instant retail capabilities.”

But the fast-growing e-commerce business has lower margins than New Oriental’s legacy education business, which offers non-academic tutoring in 60 cities across China and remains the core of its business, providing $4 billion, or 70.8% of revenue in its 2026 fiscal year. New Oriental’s shares fell by 12% the day of its earnings announcement, possibly due to margin slippage from 20.4% a year earlier to 20.0%, a result of scaling up both of its businesses, according to CFO Stephen Yang Zhihui.

Analysts think the sector is back on sound footing after bouncing back from the blow in 2021. The 15 who cover TAL think its revenue will grow 18% to $3.55 billion in its current fiscal year. And all but two of the 20 analysts canvased by Yahoo Finance gave the company a “buy” or “strong buy” rating. The company currently trades at a price-to-earnings (P/E) ratio of 7.6 times.

That’s just half of the P/E ratio of 15.7 times for New Oriental, which also gets similarly high ratings form analysts. That suggests that investors feel less comfortable with the quality of TAL’s comeback compared with New Oriental’s. They could also be concerned about TAL’s ability to manage its Epic acquisition that has created such wild swings on its bottom line over the last two quarters.

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