Guosen: Personal education service needs continue to evolve Different tracks drive consumption differently.

Guosen released a research report stating that the education industry is entering a period of structural transformation driven by policy adjustments, strategic needs, and AI technology. The reforms in the college entrance examination system and the expansion of regular high school enrollment are reshaping the demands for higher education. The demands for civil service examinations, vocational education, and degree upgrades are strong due to employment pressures. In the subdivision track, the expansion of K12 education and training is slowing down, with a clear strategic goal of improving quality. It is recommended to focus on leading companies undergoing transformation and opportunities for valuation repair in the higher education sector. Guosen's main points are as follows: Overview of the Education Industry The education industry, closely linked to education and employment, has nurtured several billion-dollar enterprises with its essential needs and prepaid business model. However, the industry is constrained by the "impossible triangle" of "large scale, low cost, and personalization". In the outcome-oriented subtracks, teaching results can easily be diluted by the scale of students, leading to low industry concentration (except for a short period when the CR3 of public examinations under the agreement class model was close to 40%). According to Frost & Sullivan, the CR5 of K12 education and training was only 4.7% in 2017. AI education features low cost and personalization, offering new ideas to solve the impossible triangle, and can also serve as a feeder product in layered product design, achieving scale expansion while reducing dilution of the core product's reputation. This is an important development direction for the education industry at this stage. Policy adjustments such as the "five-five distribution" and the expansion of regular high school enrollments in response to the country's talent strategic needs; reforms in the college entrance examination system emphasize the challenges and opportunities for companies providing education services related to higher education. Different from the rapid reduction in supply of K9 subject training under the "double reduction" policy, this round of education services related to higher education is expected to face continuous demand adjustments. Vocational schools and private high schools are expected to compete for enrollment in regular high schools, and subject training aimed at closing the gap in scores might face challenges such as weaker strategies based on past practices and a reduction in training motivation due to decreased exam pressure. However, publicly listed companies with relatively strong adjustment capabilities also have opportunities to increase market share. Top K12 education and training companies have started focusing on improving quality and turning towards real empowerment, private high schools are using precise AI teaching to enhance the quality of education, and vocational schools are broadening their sources of high school students. There is strong demand for education services, but the consumer motivations vary in different subtracks: 1) Civil Service Examinations: By 2026, the number of people taking the national civil service examination in China reached a record high of 3.718 million, up 9%. In the current employment environment, the stability of civil service positions is very attractive, and it is expected that the popularity of taking the exam will be high. In the early 1990s, Japan experienced a similar civil service examination craze, but there was no clear advantage in salary for public servants compared to the private sector. 2) Vocational Education: China attaches great importance to skilled personnel, and there is a strong demand for skills training. A survey conducted by the Ministry of Human Resources and Social Security in 2024 showed that nearly half of university students agreed that "going back to school" to learn skills would help with employment. In Japan, recruitment is influenced by the "lifetime employment system" and the "recruitment of a large number of fresh graduates", placing more emphasis on qualifications and loyalty during recruitment, but companies will continue to provide on-the-job and off-the-job training to help employees update their skills. 3) Strong demand for educational qualifications: The enrollment rate for higher education in China increased from 48.1% in 2018 to 60.8% in 2024, and the number of graduate students increased from 760,000 in 2018 to 1.19 million in 2024, indicating a strong desire for higher education qualifications. The undergraduate enrollment rate in Japan rapidly increased from 53.7% in 1990 to 70.5% in 2000 during the period of employment difficult; although the economic return on higher education has temporarily declined due to employment pressure, educational qualifications continue to be sought after as a clear path to improving competitiveness. 4) K12 Education and Training: Although Japan has experienced a period of "relaxed education," the participation rate in third-year training classes increased from 47% in 1985 to 65% in 2007, indicating that there is an objective demand, but some have shifted from past exam-driven methods to an emphasis on "academic improvement." According to a 2022 survey by CIEFR on the short-term effects of reducing academic burden policy, the participation rate in K12 subject training in China is 17.4%, and there is still room for significant increase after compliance transformation. Investment logic for specific subtracks and individual stocks: The pace of expansion of offline branches in K12 education and training is slowing down, with industry leaders focusing on quality improvement strategies and shareholder returns. In addition, companies such as Doushen (Beijing) Education & Technology Inc., New Oriental, Youdao, Beijing Kaiwen Education Technology, Gaotu Group, SCHOLAR EDU, Beijing Shengtong Printing, are actively developing AI businesses to create additional growth. Private high schools are experiencing a slowdown in enrollment growth due to external factors, but are enhancing the quality of education to compete effectively. Progress in the conversion of existing private higher education institutions is still slow, but some provinces and cities have released positive signals. Publicly listed companies are increasing capital expenditure to enhance the quality of education. The leading company in vocational education, CHINA EAST EDU, has a stable market position, benefits from expansion of student sources, regional center construction, and rapid profit margin recovery. The popularity of civil service exams remains high, with companies like Huatu Education and FENBI adopting strategies such as large single-product and AI empowerment to address competition from smaller institutions. Investment recommendations: The education industry is closely related to policy trends and individual education service demands. Considering the industry competition landscape and the relaxed operating environment, 1) it is recommended to focus on the civil service examinations and vocational education tracks with the highest employment relevance and relatively strong market demand. For civil service examinations, Cendes Co., Ltd., which benefits from optimized competition among top offline providers, and FENBI, which actively invests in AI to address competition, are recommended; for vocational education, CHINA EAST EDU is promising due to its leading position in blue-collar technical training and potential for further profit margin recovery. 2) The rigid demand for educational qualifications remains, but the education service industry related to higher education is facing structural adjustments in demand. It is advisable to choose leading K12 education and training companies that actively adapt to changes and focus on quality improvement, such as BESTSTUDY EDU, NEW ORIENTAL-S, Xueda (Xiamen) Education Technology Group, and Doushen (Beijing) Education & Technology Inc., as well as to monitor the progress of industry leaders in AI education software and hardware. 3) Progress in the conversion of existing private higher education institutions has been slow, with lower valuations compared to other tracks in the education sector. Signals suggesting progress in Guangdong and Hunan may lead to a moderate valuation recovery. 4) Companies such as Shanghai Action Education Technology, which focus on entrepreneur training, have strong pro-cyclical attributes. The elasticity of attendance rates is more significant when the confidence of entrepreneurs recovers, but this report focuses on the direction of higher education and employment, therefore, this aspect will not be discussed here. Risk factors: Strict policy changes, shareholder sell-offs, loss of key personnel, macroeconomic pressures, lower than expected enrollment numbers, and obstacles to tuition fee increases.