Guosheng Securities: The prosperity of education and training is expected to continue, and the commercialization process of AI education is accelerating.

Guosheng Securities released a research report stating that the current trend in the education and training industry is still favorable, with the population in the appropriate age group remaining high and the industry's prosperity expected to be maintained. The policy environment is shifting towards a positive direction, and a benign regulatory attitude is becoming increasingly clear. AI is leading the education revolution, and the domestic commercialization process is expected to accelerate. The industry's competitive landscape is optimizing after the "double reduction" policy, and the transformation of non-disciplinary majors is being validated. The capacity and profitability of K12 education and training companies are continuing to grow, and the industry is optimistic about the growth prospects of leading companies that operate compliantly and possess teaching and research, faculty, and brand strength. The recommendation is to continue to pay attention to opportunities in the education and training sector. Key recommendations include Xueda (Xiamen) Education Technology Group (000526.SZ) and NEW ORIENTAL-S (09901). Guosheng Securities' main points of view are as follows: Industry Trends 1) The population in the appropriate age group is still high, and the industry's prosperity is expected to be maintained. Over the next 10 years, the population in the K12 appropriate age group (5-18 years old) is expected to remain high, coupled with a continuous increase in the gross enrollment rate, and the number of K12 students will remain stable. Meanwhile, families represented by the new middle class have a high level of focus on education, with spending on extracurricular education and training accounting for a high proportion of household educational expenditures. By 2023, the participation rates in subject-specific and non-subject-specific training are expected to reach 13.5% and 13.6% respectively, and the industry's prosperity is expected to continue. 2) The policy environment is shifting towards a positive direction, and a benign regulatory attitude is becoming increasingly clear. Since the introduction of the "double reduction" policy, various supporting policies have promoted the high-quality standardization development of the K12 education industry. In February 2024, the "Regulations on the Management of Off-campus Training (Draft)" was issued, further clarifying a benign regulatory attitude and shifting the policy environment towards a positive direction. 3) AI is leading the education revolution, and the domestic commercialization process is expected to accelerate. Education is an important scene where AI empowerment is relatively easy to achieve and is expected to bring about long-term changes. Overseas, multiple AI+ education hot products have been successful. With the advent of the AIAgent era and the emergence of high-performance, low-cost, open-source large models represented by DeepSeek, the industry is optimistic about the rapid product implementation and commercialization opportunities of leading education companies in China that have strong product capabilities and clear business models. The demand for education and training is relatively inflexible, with a market space of about 500 billion Based on assumptions about the number of people in the appropriate age group, participation rates, and per capita prices, the estimated overall scale of the K12 education and training industry in 2023 is expected to reach over 500 billion: The high school subject-specific training market is expected to remain stable due to the continuing pressure of college entrance exam competition, with a relatively rigid demand, and the market size is expected to reach billions. The quality education sector is expected to pick up the relay of the original K9 subject-specific demand after the "double reduction" and is currently estimated to be about 400 billion in market size, with great growth potential. The industry is expected to continue to grow overall in the future as participation rates and per capita prices continue to rise. Improved competitive landscape, optimistic about the increase in market share of leading companies Since the introduction of the "double reduction" policy three years ago, the boundaries of policy regulation have gradually become clear, with a large number of small and non-compliant institutions being cleared out, optimizing the industry's competitive landscape and favoring the high-quality development of compliant leading companies. Currently, the industry landscape remains relatively fragmented, with a forecasted CR2 of 10.4% by 2023 based on revenue metrics. The industry is optimistic about the future growth of leading companies in market share based on advantages such as brand, scale, and research. Improved operational capabilities of leading companies post "double reduction", optimized store profit model On the revenue side, starting from the second half of 2023, the number of leading branches and teachers will gradually recover, and the per capita price will continue to rise, driving the revenue of leading companies to exceed the levels before the "double reduction." On the cost side, post "double reduction", the competition landscape has been optimized, and leading companies have shifted their enrollment model towards recommendations and private community enrollments, resulting in significantly lower customer acquisition costs. At the same time, the improvement in teacher efficiency is expected to reduce personnel costs, continuously improving costs. With revenue growth and cost improvement, the uphill period for leading companies is generally shortened, optimizing store profit models. The projection is for the profit margin per store to increase by about 20% compared to levels before the "double reduction", and the future expansion pace and profit margin improvement capabilities of leading companies are expected to continue to be positive. Risk Warning: Industry policy risks, intensified industry competition, delays in new business developments, macroeconomic fluctuations, risks of calculation errors.