GOTU - Education Provider TAL Counts On AI Devices And MathGPT

2023-11-16 10:45:00 ET

Summary

• TAL Education Group has swung into the black after investing in AI-powered educational devices and developing a newly approved MathGPT tool.
• TAL’s revenue rose 40% in the second quarter, propelling the education group from a loss to a net profit of $37.9 million.
• Competition over educational AI is heating up in China, as companies develop large-scale AI models and launch intelligent learning devices.

Imagine a smart tool that can help a struggling student grapple with numbers as well as words. For China’s TAL Education Group ( TAL ), arithmetic is the next frontier in AI-assisted learning.

Like many companies in the sector, TAL has been eager to harness the power of artificial intelligence as a teaching aid, even before ChatGPT burst onto the business scene a year ago. In February, TAL launched a smart learning device linked to the company’s XRS online teaching platform. Going forward, it is looking to add more intelligent tools into the mix, including a large-scale AI model that could act as a personal math tutor.

Educational hardware with embedded AI looks to be a smart choice for China’s learning industry, which is still recovering from a government crackdown two years ago on after-hours tutoring.

TAL revealed on Nov. 7 that its MathGPT had passed the vetting stage under Chinese regulations governing generative AI, becoming one of the first large-scale educational models to get the official green light. This meant the model could move from internal testing to the open market, the company said.

In the future, the learning solutions provider intends to add a series of AI applications to its learning device, as they are developed, including “AI Precision Learning”, “AI Answering Questions”, and “AI Dialogue Learning”. Through an interaction with a student, the dialogue-based app would be able to identify development areas and devise a staged learning plan.

After the news, TAL’s share price rose for three straight days. The cumulative gain of 4.3% expressed investor confidence about the potential payoff from the company’s big bet on AI. The stock had been fluctuating around $9, down 90% from a post-IPO peak of $90.96 but well above a low of $1.60 in 2022.

At the beginning of the year, TAL launched its first learning device, entering the educational hardware market alongside companies such as iFlytek (002230.SZ), Baidu ( BIDU , 9888.HK), via its AI brand Xiaodu, and Zuoyebang. Despite coming later to the device business, TAL can leverage its XRS brand and tutoring resources. At TAL’s online flagship store on TikTok, the XRS learning tablets are priced from 4,500 to 5,200 yuan. More than 140,000 of the tablets have been sold on TikTok alone, adding up to a gross merchandise volume (GMV) of more than 630 million yuan ($86 million).

The new income stream has bumped up the numbers in TAL’s latest earnings , announced on Oct. 26. Revenues in the second quarter to the end of August rose 40% to $412 million from the same period last year. The hardware boost meant the company flipped from a net loss of $787,000 in last year’s second quarter to a net profit of $37.9 million this time. Operating cash flow also turned positive in the latest quarter, with a net inflow of $130 million.

After being forced to axe tutoring for school subjects, TAL has found an alternative growth path blending educational services, intelligent hardware, textbooks and products using large-scale learning models. The services include literacy classes for small groups, online courses for larger groups and tutoring for overseas study in science, coding and humanities. However, TAL did not disclose a revenue breakdown for each business in the quarterly results.

Fierce competition in AI gadgets

After deciding to invest heavily in AI technology, TAL diverged from an earlier strategy of cost controls. Operating expenses and sales costs rose nearly 31% in the quarter from the year-earlier period to $383 million. Cost of sales came to $169 million, a year-on-year rise of 44.6%, while sales and marketing expenses rose just under 49% to $116 million.

The need for higher spending was driven by Intensifying competition in the education industry. Aside from MathGPT, another AI model to gain Chinese regulatory approval is “ZiYue” from Youdao ( DAO ). The language tool, installed in dictionary pens and other devices, acts as an AI tutor, answering children’s questions and helping to resolve study problems.

Students and scholars can choose from various AI language models in learning devices, such as the Xinghuo model in iFlytek machines, the Xiaodu Lingji in the Xiaodu Qinghe, an AI-driven mobile phone, and the Tongyi in a learning device from TmallGenie, part of the Alibaba ( BABA ; 9988.HK) group. All the devices are capable of AI tutoring, voice interaction and other functions similar to those on offer in TAL’s XRS device.

Compared to Baidu, Alibaba and other AI-focused Internet companies, TAL can count on years of experience in the tutoring business, generating data to shape its applications. TAL described its data trove and its understanding of learners as assets in debugging a large-scale AI model. Taking AI tutoring as an example, XRS can draw on accumulated experience of tutoring methods for children of different age groups.

But the strategy does carry policy risks, bearing in mind that the government has acted in the past when it sees a threat to children’s wellbeing. Regulations on the online protection of minors, due to go into effect early next year, require devices aimed at children to identify harmful or unlawful content. Once the rules come into force, regulation of learning devices may come under closer scrutiny.

In terms of valuation, TAL’s current price-to-book (P/B) ratio is 1.6 times. That ratio lags the three times for New Oriental Education ( EDU ; 9901.HK), an online tutoring giant that has branched out into e-commerce, but the figure exceeds the 1.3 times for extra-curricular tutoring business Gaotu Techedu ( GOTU ). Therefore, investors may wait to see whether TAL’s recent moves will add up to a bigger share of the market for AI-powered learning devices, and higher profits in the future.

Disclosure: None

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