Guosen Securities has maintained an "Outperform" rating on the education sector in its latest research report. The firm prioritizes the K-12 training segment, which offers strong earnings and valuation recovery potential as policy frameworks become increasingly clear. It also recommends leading vocational training players that benefit from a moderate regulatory environment, strong downstream industry momentum, and attractive dividend yields. From a long-term perspective, AI education is seen as a critical factor in solving the "impossible triangle" challenge of the education industry, prompting recommendations to monitor industry trends and product iterations closely. B-end products are expected to convert orders first under policy support, while C-end applications could unlock greater growth potential once teaching effectiveness is validated.

Guosen Securities highlights that the sector's share price performance and interim earnings results have reinforced each other. In the first half of 2026, education revenue demonstrated notable resilience, with K-12 training, vocational training, and basic academic education growing 21%, 15%, and 14% year-on-year respectively, accelerating from the 2025 full-year pace. Profit momentum was even more pronounced, with net profits attributable to shareholders in these three segments surging 186%, 31%, and 18% year-on-year respectively (K-12 training would be 71% after excluding investment gains from TAL Education). Profit growth generally outpaced revenue growth, reflecting that industry leaders are sharpening their focus on core operations while continuing to unlock operating leverage. In terms of market performance, the education sector (Shenwan index) climbed 31.1% between July 24 and September 9, driven by a combination of interim earnings expectations and the AI education theme, generating clear excess returns. However, from a valuation perspective, quality leaders still have room for further re-rating.

One strategy is to select sub-segments based on policy temperature differences. K-12 training demonstrates robust demand resilience; although supply was previously impacted by regulatory shocks, policy frameworks have gradually become clearer. Brands with strong recognition have concentrated on their core businesses and delivered solid interim results, with the sector offering the most significant valuation recovery potential overall. Vocational skills training and civil service exam preparation do not involve compulsory education and operate in a milder regulatory environment, though sub-sector momentum varies and requires selection based on downstream industry cycles. In basic academic education, public school enrollment expansion poses some impact on admissions, but leaders can still attract students through high-quality teaching. Private higher education awaits more substantial progress in conversion to for-profit status.

A second strategy examines the long-term view that AI education represents a new variable for industry leaders to consolidate market share. The education market is vast but historically fragmented due to the "impossible triangle" of large scale, low cost, and personalization. Companies that once reached 100 billion yuan market capitalization all found ways to temporarily enhance industry concentration. AI standardizes high-labor processes including diagnosis, feedback, planning, and assessment, offering a new pathway to overcome the impossible triangle and potentially serving as a fresh tool for leaders to strengthen their positions. In the industry landscape, C-end applications with lighter verification scenarios, such as language learning and hobby-based courses, are scaling first, though result-driven willingness to pay is relatively stronger. High-ticket items and scenarios with strong outcome commitments still require teacher or class advisor support, with AI primarily enhancing process efficiency. This creates two distinct C-end paths: first, subscription products with weak outcome commitments and high cost-effectiveness, similar to Duolingo, where the focus lies in learning habits, content systems, and low customer acquisition costs, resulting in valuations closer to premium consumer subscriptions. Second, serious outcome-oriented human-machine collaboration products, where teachers safeguard learning results, limiting supply expansion speed and valuation premiums; the key lies in achieving outcomes and user growth without increasing teacher headcount. B-end customers, including schools, institutions, and government entities, exhibit genuine demand, confirmed budgets, and strong payment capability, but project-based models involve longer acceptance and receivables cycles.

Risks to consider include stricter policies, shareholder reductions, key talent attrition, macroeconomic pressure, lower-than-expected enrollment figures, and obstacles to tuition fee increases.