2025-07-01 00:40Investment Ratings - Upgrade New Oriental Education (EDU) to Buy with target prices of US$77/HK$60, representing a potential upside of 54% [1][9] - Downgrade TAL Education Group (TAL) to Neutral with a target price of US$11.54, indicating a downside of 14% [1][18] Core Insights - The report highlights a pair trade strategy to capitalize on the diverging operational trajectories between EDU and TAL, with EDU expected to benefit from operating leverage in K12 education while TAL faces ongoing hardware losses [1][4] - EDU's revenue mix is shifting towards domestic segments, with K9 and Senior High expected to grow from 45% to 55% of revenue by FY26E, leading to significant margin expansion [2][12] - TAL's core Learning Services business provides a solid downside floor, but persistent losses in the Content Solutions segment limit near-term upside potential [3][18] Summary by Sections New Oriental Education (EDU) - The upgrade to Buy is based on a compelling domestic mix-shift story, with structural margin expansion expected as domestic segments grow significantly [2][54] - The report projects that each 1% revenue shift from overseas to domestic will add 8-10 basis points to consolidated margins, creating a multi-year earnings tailwind [2][13] - EDU's current valuation at ~17x NTM P/E does not reflect its intrinsic value, with a sum-of-parts analysis suggesting substantial upside potential [2][55] - Cost discipline measures, including rent cuts and controlled headcount growth, are expected to amplify operating leverage [2][14] - The anticipated dividend plan is viewed as a key near-term catalyst for re-rating [2][15] TAL Education Group (TAL) - The downgrade to Neutral reflects a balanced risk/reward profile, with limited near-term upside due to ongoing operational challenges [3][18] - TAL's core Learning Services business, combined with its net cash position, suggests a firm value floor at US$10.89 per share [3][31] - The Content Solutions segment is projected to continue incurring losses through FY27E, which significantly impacts overall profitability [3][18] - A proprietary lease-based analysis indicates that TAL's center maturity distribution is evolving, which is expected to drive margin expansion over time [20][24] - The report emphasizes the uncertainty surrounding the path to profitability for the Content Solutions segment, with execution risks persisting through FY28E [3][33]