Business

Know the business: a six-brand China beauty house re-priced as an option on its skincare pivot

Yatsen is a multi-brand China beauty group — three color-cosmetics brands (Perfect Diary, Little Ondine, Pink Bear) and three skincare brands (Galénic, DR.WU mainland-China business, Eve Lom) — that was founded in 2016 and listed on the NYSE in late 2020 [1]. The "leading China-based beauty group" label hides three more important facts. First, this is a single-engine business with a strategic transformation overlaid on it: skincare grew from 33.5% of revenue in 2022 to 53.0% in 2025 at a three-year 22.4% CAGR, and that mix shift — not better operations — drove gross margin from 68.0% to 78.2% and net loss margin from 22.2% to 2.2% over the same window [2]. Second, the cycle has just turned: FY2025 was the first non-GAAP profitable year since 2021, on +26.7% revenue growth [3] [4]. Third, the engine is structurally fragile: a 78%-gross-margin P&L gets eaten by a ~66%-of-revenue selling and marketing line, and Q1 FY2026 showed how quickly the operating margin can flip when traffic-acquisition costs rise — operating loss margin moved from 4.1% a year ago to 9.7% in three months [5].

What you actually own

Yatsen reported FY2025 net revenue of RMB4,298.1 million (US$614.6 million), with a 78.2% gross margin and a GAAP net loss of just RMB92.4 million (US$13.2 million) — a 2.2% net loss margin against 20.9% the year before [3] [9] [4]. Non-GAAP net income was RMB8.4 million — first positive print in three years [4]. This is a small-cap beauty house at an inflection point, not a steady-state compounder.

The brand portfolio — two segments inside one P&L

Yatsen reports two product segments, and they have very different economics. Color Cosmetics Brands — Perfect Diary, Little Ondine, Pink Bear — sell at mass-to-mid price points, with shorter purchase cycles and lower customer loyalty. Skincare Brands — Galénic, DR.WU mainland-China business, Eve Lom — sit in premium and clinical with structurally higher gross margins and stickier repeat behavior [2] [10].

A few things worth pinning. Perfect Diary remains the original engine and the only fully organic brand — every other brand was bought, between June 2019 (Little Ondine) and March 2021 (Eve Lom) [11]. The four most recent acquisitions were all designed to push Yatsen up-market and into skincare; the Eve Lom reporting unit subsequently took a goodwill impairment when results came in below acquisition assumptions [12] [13].

Segment revenue and operating economics

The chart is the single most important picture in this tab. Color-cosmetics revenue fell from ¥4.92 billion in 2020 to ¥1.97 billion in 2024 before stabilizing at ¥2.01 billion in 2025; skincare scaled from ¥0.20 billion to ¥2.28 billion over the same window, a ~11x lift [14] [2]. The headline "Yatsen is back" story in 2025 is not really "Perfect Diary is back" — color cosmetics grew only 1.9% — it's "Galénic and DR.WU scaled hard," with skincare up 63.5% year-over-year and reaching 61.1% of Q4 revenue [3] [15].

Both segments still lost money at the operating line in FY2025

The segment disclosure is more sobering than the consolidated print. Even in FY2025, with all that growth, both reportable segments showed operating losses before unallocated expenses:

Color cosmetics narrowed from a RMB352 million segment loss in 2023 to RMB59 million in 2025; skincare narrowed from RMB431 million to RMB31 million [16]. The trajectory is the right one, but the punchline matters: neither core segment had crossed into operating profit by year-end 2025. The non-GAAP "profit" headline is real, but it depends on excluding ¥101.8 million of unallocated share-based comp and intangibles amortization [3].

The economic engine: a 78% gross margin that earns less than a 1% non-GAAP margin

The shape of this P&L is the entire investment debate. The 78.2% gross margin is durable, real, and rising — it rose 1,020 basis points from FY2023 [17]. But selling and marketing alone consumed 66.3% of revenue: ¥2.85 billion in absolute terms, including ¥1.83 billion in advertising and brand promotion plus ¥512.6 million of platform commissions [18]. The two largest below-the-line costs are literally what you pay platforms and KOLs for one customer touch. Operating margin = gross margin minus traffic cost — that is the model.

Gross margin has marched up 460 basis points over three years while S&M intensity has barely moved [17] [19]. The lever working in the company's favor is mix; the lever working against it is platform pricing power. CFO Donghao Yang has been explicit about which lever matters: "with Skincare business, the gross margin, net margin are typically much higher than Color Cosmetics brands. So by doing that, we're going to be able to improve our margin profile" [20].

The Q1 FY2026 fragility test

Three months later, the model showed its fragility. Q1 FY2026 revenue grew 22.5% to ¥1.02 billion, skincare grew 58.5%, and gross margin reached an all-time high of 80.2% — yet operating loss margin widened from 4.1% a year earlier to 9.7% because S&M expense jumped to 72.2% of revenue (from 66.4%) on what management explicitly attributed to "higher traffic acquisition costs on the Douyin platform" [5] [21]. Q2 FY2026 guidance — ¥1.20-1.30 billion, ~10-20% growth — implies management plans to keep leaning into marketing rather than chase short-term margin [8]. FY2025's non-GAAP turn is therefore a starting point, not a confirmed margin trajectory.

Channels: an 85%-DTC, all-digital, multi-platform sales motor

Sales to end customers (DTC online + offline stores) generated 84.9% of FY2025 revenue; the residual ~15% goes through e-commerce platform distributors (primarily JD.com and Vipshop) and offline distributors [22]. The online stack is structurally three-layered: shelf marketplaces (Tmall, JD.com, Vipshop, Pinduoduo) for transactional volume, social/content platforms (Douyin, RedNote, Bilibili, Weixin) for brand discovery and livestream conversion, and a still-meaningful offline experience network of 77 stores (down from 88 a year earlier as Perfect Diary closed underperformers and Galénic expanded its own counters) [23] [24] [19]. Prestige skincare additionally distributes through Sephora and Sam's Club; color cosmetics through The Colorist [24]. And Yatsen was an early KOL-marketing adopter — the company highlights all three brands (Perfect Diary, Galénic, DR.WU) being featured on top livestreamer Austin Li's "All Girls' Offer" reality show ahead of Double 11 2025 [23].

Yatsen's "channel" is software. The real customer-acquisition asset is the playbook for running concurrent campaigns across five platforms with different ROI economics. There's no shelf moat to defend, but also no shelf gatekeeper to pay rent to.

R&D and the moat question

Yatsen's filings claim R&D is "a fundamental pillar of our competitive advantage" and back it with hard numbers: R&D expense was 3.3% / 3.2% / 3.2% of net revenue across FY2023-2025 — a stable commitment through the cycle — and the patent portfolio has reached 269 worldwide (10 utility model, 158 design, 72 invention, 29 pending) [25] [26]. Trademarks across China and abroad totaled 4,453 [26].

R&D intensity is in the same neighborhood as L'Oréal and above Estée Lauder — material, not token. The infrastructure tells the same story: a 1,849-sqm R&D center in Guangzhou, a Shanghai R&D hub, joint laboratories with Ruijin Hospital and Sun Yat-sen University, a Cosmax-JV manufacturing-and-R&D hub of 66,462 sqm in Guangzhou (Yatsen as minority shareholder), and a Galénic R&D facility of ~920 sqm in France [25]. The company also names proprietary technologies — Biotec™ for the Perfect Diary Biolip Essence series, Smartlock™ for setting powder, ActiveAnchor™ delivery for Galénic — that Yatsen positions as transferable platforms rather than one-off SKUs [27].

The honest moat read. Yatsen's competitive position has two real, narrow moats and several aspirational ones.

• Owned premium brand equity in skincare is real — Galénic (1978, Pierre Fabre heritage), DR.WU (2003, dermatologist-developed in Asia), Eve Lom (1985, iconic UK cleanser balm) all carry decades of credibility that cannot be re-created from a Tmall product launch [2] [10]. The question is whether Yatsen can scale that equity in China without diluting it — a thing legacy multinationals have done well and many acquirers have not.
• Omni-channel digital operating capability is real and observable — the playbook for running the same brand across Tmall, Douyin, RedNote, Sephora, Sam's Club, The Colorist, and 77 owned stores at coordinated price points is a non-trivial capability built over seven years [24]. But it is shared with every domestic peer doing the same pivot.
• R&D-as-a-moat is aspirational. 269 patents and three named platform technologies on ¥4.3 billion of revenue is more than zero, but Yatsen's filings concede the industry frame: "We compete primarily on the basis of perceived value, including pricing and innovation, product efficacy, service to the customer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives, direct sales, KOL collaborations" [26]. When the moat list is twelve items long, none of them is a moat.
• Manufacturing scale via the Cosmax JV lowers unit cost and gets first-look on new formulations but is not exclusive — Cosmax serves every other Chinese brand too [25].

Net: not a moat-protected compounder. A brand house with two narrow advantages competing in the world's most contested beauty market.

How this stacks against the actual peer set

The auto-screened peer set in data/competition/peer_set.json mixes three Chinese listed cosmetics groups and three global majors. They are useful benchmarks for what good looks like — but they are not all true competitors in the same model. Proya, Yunnan Botanee, and (to a lesser degree) Shanghai Jahwa are the closest model peers; Estée Lauder, L'Oréal and Shiseido are scale and prestige references, not substitutes. (Most-cited domestic challenger Florasis is private and not in the corpus.)

Three observations from this table.

1. Gross margin is not Yatsen's problem — it is the highest in the China set and ahead of every global major. That is the skincare-mix and pricing-discipline payoff [17].
2. Operating margin is the gap. Proya runs at 17.6% with broadly similar gross margin and a similarly digital business model. Yatsen at -4.3% has 22 points to close. The closer the comp, the bigger the embedded margin opportunity — or the bigger the brand-equity gap.
3. YSG is sub-scale globally — US$615M revenue versus US$1.5B at Proya, US$14B at Estée Lauder, US$46B at L'Oréal. Sub-scale beauty houses earn lower margins in this industry because S&M minimums don't scale down [28].

YSG and Estée Lauder occupy oddly similar coordinates — high gross margin, negative operating margin — for very different reasons. Estée Lauder is paying for a China and travel-retail destocking cycle on a giant base; Yatsen is paying for a transformation cycle on a tiny one. Proya sits where Yatsen wants to be in three to five years.

Cycle exposure: where in the cycle are we?

The economic engine has lived three lives in six years.

• FY2020-21 (peak). Net revenue scaled to ¥5.84 billion in 2021 on the back of Perfect Diary's category-defining KOL playbook; skincare was barely 14.6% of mix [14]. Even at peak, the company never earned a GAAP profit, on the same fundamental structure (huge S&M intensity).
• FY2022-24 (trough). Revenue fell for three consecutive years to a low of ¥3.39 billion as zero-COVID destroyed color-cosmetics occasions and Douyin broke the Tmall/Weibo ROI math the brand had been built on. Goodwill impairments hit twice: RMB354.0 million in 2023 and RMB403.1 million in 2024, almost all attributable to the Eve Lom reporting unit [13]. Net losses ran ¥710-815 million per year.
• FY2025 (turn). Revenue grew 26.7% to ¥4.30 billion; gross margin reached 78.2%; the company posted its first non-GAAP profit since 2021 [3] [4]. On the Q4 call the CEO described growth as "significantly outpacing the industry average" (NBS national beauty retail grew 5.1% in 2025) [15].

Where we are now. Cycle position is early-recovery. The macro tailwind is real (NBS beauty retail accelerated to +8.2% in Q4 from +5.1% full-year [15]) but the company-specific lever — skincare mix — is the bigger contributor. Q1 FY2026 confirmed the top-line momentum (+22.5% revenue, premium-skincare +61.4%) and confirmed the fragility (operating loss widened on traffic costs) [29] [5]. This is a name that still needs to prove the margin curve will not flatten.

Governance and capital allocation — founder control, ADS structure, recent capital raise

Yatsen is a "controlled company" under NYSE rules: founder, chairman and CEO Mr. Jinfeng Huang beneficially owns all Class B ordinary shares, each carrying twenty votes versus one for Class A, giving him absolute voting control [30] [31]. The ADS structure is 20 ordinary shares = 1 ADS [6] — important to remember when reading per-share numbers, because dividing per-ordinary-share figures by 20 understates per-ADS economics by a factor of 20.

Capital allocation has been buyback-heavy and is now bridging to growth-funded.

• The board authorized successive share-repurchase programs from November 2021 onward, expanding from US$100M → US$150M → US$200M, and adding a fresh US$30M program in May 2025; by the FY2025 annual report Yatsen had repurchased 40.2 million ADSs for US$202.2 million in aggregate [30]. US$499.3 million of IPO proceeds had been deployed to the buyback program by year-end [32]. On a US$615M-revenue base, this is a meaningful return-of-capital story for a still-unprofitable company.
• In May 2026, Yatsen closed the first tranche of a US$120 million private placement of convertible notes and warrants with Trustar Capital, Hillhouse and founder Jinfeng Huang himself [29]. Two reads: (a) the company is funding the next phase of growth investment with a smart-money anchor rather than a public offering, and (b) the marquee names (Hillhouse, Trustar) participating alongside the founder is the most credible third-party validation of the strategy that exists in the record.

Balance sheet still net-cash. As of FY2025 year-end Yatsen held RMB1.05 billion (US$150.7 million) in cash, restricted cash and short-term investments against essentially no financial debt [4]. FY2025 net cash used in operations was just ¥94.7 million — modest given the strategic investment cycle. The convertible adds capacity for a step-up in brand and R&D investment without forcing a dilutive equity raise at the current depressed share count.

Risk register — what would break the thesis

The single biggest single-quarter risk is traffic-acquisition cost on Douyin and Tmall. Management has named it directly in three consecutive quarterly cycles — the FY2025 10-K, the Q4 2025 commentary on Double 11, and the Q1 FY2026 release [18] [33] [5]. Investors should treat the 1Q operating loss not as a one-off but as evidence that the marginal new platform impression costs more than the operating-leverage tailwind from the skincare mix.

How to value this — the lens

This is not a P/E business; FY2025 earnings are barely positive on a non-GAAP basis and negative on GAAP. Below are three valuation lenses, ranked by usefulness given the cycle stage.

The single most powerful question this name should be underwritten on: what mid-cycle non-GAAP operating margin can Yatsen sustain three years from now, given the skincare mix glide-path? At 5%+ (sub-Proya, but real), the discount to peers is hard to justify on fundamentals. At 0-2% (margin held back permanently by platform pricing), the cycle turn is a trade, not an investment.

Three things the bear and the bull will both miss

1. The non-GAAP profit in FY2025 was not earned by a tighter S&M line; it was earned by a higher gross margin. The 78.2% gross margin gives the bull the mix-story comfort, but the level of S&M spend (66.3%) barely changed. So the marginal next dollar of margin still depends on traffic-cost discipline that the company has not actually demonstrated — including in the most recent quarter.
2. Segment-level operating losses are still flowing despite the headline turn. Both color cosmetics (-¥59M) and skincare (-¥31M) lost money at the segment level in FY2025 [16]. The consolidated non-GAAP profit comes from gross profit minus unallocated corporate, not from the brands themselves printing money. The "winning brand" thesis needs a couple more years of evidence.
3. The Cosmax JV and the convertible-note participants are the two most underrated pieces of the story. A 66,462-sqm minority-share manufacturing JV with the world's largest contract cosmetics maker [25], plus US$120M of patient capital from Trustar and Hillhouse alongside the founder [29], are the two third-party-validated pieces of the bull case. Neither shows up in consensus earnings models.

References

1. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 Information on the Company — Business Overview — p.78
2. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 Business Overview — Strategic Transformation Plan and Skincare Brands — p.79
3. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — FY2025 vs FY2024 revenue, unallocated reconciliation — p.128
4. Yatsen Holding Limited — Q4 and Full Year 2025 Earnings Press Release — Full Year 2025 Financial Results, balance sheet — p.4
5. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release — Operating Expenses and Operating Loss commentary — p.2
6. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release — Statements of Operations footnote on ADS ratio — p.10
7. Yatsen Holding Limited — Q4 and Full Year 2025 Earnings Press Release — Exchange Rate — p.5
8. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release — Exchange Rate and Q2 FY2026 outlook — p.4
9. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Net loss for the year — p.130
10. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — Color Cosmetics Brands, Perfect Diary description, Eve Lom origin, DR.WU description — p.80
11. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — History of acquisitions (Little Ondine, Galénic, DR.WU, Eve Lom) — p.77
12. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 3 Risk Factors — Eve Lom goodwill impairment context — p.44
13. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Goodwill impairment RMB354.0M (FY2023) and RMB403.1M (FY2024) — p.131
14. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Segment net revenue breakdown FY2023-FY2025 — p.126
15. Yatsen Holding Limited — Q4 FY2025 Earnings Call Transcript — CEO prepared remarks (skincare 61.1% Q4 share, industry context) — p.2
16. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Segment income/(loss) from operations — p.127
17. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Gross margin 73.6% / 77.1% / 78.2% — p.121
18. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Selling and marketing expense detail — p.129
19. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — Operating-expense intensity, store count change — p.122
20. Yatsen Holding Limited — Q4 FY2025 Earnings Call Transcript — CFO Q&A response on skincare margin profile — p.5
21. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release — Selling and Marketing Expenses commentary — p.3
22. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 5 MD&A — DTC channel mix 84.6% / 82.9% / 84.9% — p.123
23. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — Omni-channel strategy, KOL marketing, Austin Li — p.85
24. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — Offline experience stores, Sephora, Sam's Club, The Colorist — p.86
25. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — R&D expense %, patent portfolio, R&D facilities and Cosmax JV — p.83
26. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — Trademark / IP portfolio and Competition discussion — p.88
27. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 4 — Proprietary technologies (Biotec, Smartlock, ActiveAnchor) — p.82
28. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 3 Risk Factors — Vigorous competition from multinational consumer products companies — p.20
29. Yatsen Holding Limited — Q1 FY2026 Earnings Press Release — First Quarter 2026 Highlights, CEO commentary on US$120M private placement — p.1
30. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 6 — Dual-class share structure, founder beneficial ownership, share-repurchase aggregate — p.69
31. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 6 — Controlled company status under NYSE rules — p.70
32. Yatsen Holding Limited — FY2025 Annual Report (Form 20-F), Item 10 — Use of IPO proceeds (US$499.3M deployed to buyback) — p.172
33. Yatsen Holding Limited — Q4 FY2025 Earnings Call Transcript — CFO Q4 S&M commentary on Double 11 traffic costs — p.4