Full Report

Industry — China Beauty (Color Cosmetics & Skincare)

China beauty is the world's second-largest beauty market — a ¥400 billion-plus arena of cosmetics, skincare and personal-care products sold mostly through e-commerce, mostly to female consumers in tier-1 to tier-3 cities. The economics are simple but punishing: gross margins are 65–80%, but acquiring a Chinese beauty customer through Douyin live streams, Tmall search, and KOL endorsements eats 50–70% of revenue, so net margins for digitally native brands are thin or negative. The structure is fragmented (no single player holds even a high-single-digit share), the cycle is set by consumer confidence and platform traffic costs, and the rules of the game are rewritten every 18 months by the NMPA and Chinese e-commerce platforms.

The one thing newcomers usually misunderstand: this is not a "premium global brand" industry like the one L'Oréal and Estée Lauder dominate worldwide. In China, science-backed domestic brands are taking share from global majors, and the winners are companies that can manufacture biotech-grade skincare in Guangzhou and convert Douyin live streams into measurable repurchase. Yatsen — which owns Perfect Diary, Galénic and DR.WU — is one of the listed pure-plays on that thesis, currently sub-scale relative to leader Proya and still unprofitable on a GAAP basis.

1. Industry in One Page

The brand owner sees gross margin and the marketing bill. The platform sees take rate and ad inventory. The KOL takes a commission on every livestream sale. Read the rest of the report knowing that the beauty group only keeps the margin left after the platform, the KOL, and the customer-acquisition machine have all been paid.

2. How This Industry Makes Money

Beauty groups sell branded SKUs at 4–10× COGS, but the cost structure does not stop at COGS. To get a Chinese consumer to try a new SKU on Douyin or Tmall, brand owners pay platform ad fees, KOL commissions, livestream host fees, free samples, and shopping-festival discounts. The 70%+ gross margin is real — but so is a 60%+ selling-and-marketing line.

Three takeaways from the stack. First, gross margin is genuine — Chinese ODM/OEM (Cosmax, Intercos) and proprietary formulations can land COGS at 20-30% of net revenue. Second, the gross profit is rented from the platforms and the KOLs — Yatsen's selling and marketing line absorbed roughly two-thirds of revenue in 2025 even after disciplined cost-cutting. Third, the gap between a profitable masstige operator (e.l.f., 4.5% operating margin in FY26) and a sub-scale Chinese brand-builder (Yatsen, –4.3%) lives almost entirely in selling and G&A intensity, not in COGS or R&D.

Bargaining power sits with the platforms and the consumer. Tmall and Douyin set the cost of traffic; consumers can switch brands at essentially zero friction. Brand owners earn back power only through proprietary actives, scientific claims that survive NMPA filing, and the ability to launch hit SKUs ("Biolip Essence Lipstick," "DR.WU Mandelic Acid Serum") that drive repurchase rather than one-time trial.

3. Demand, Supply, and the Cycle

Where the cycle bites first: volume in color cosmetics. Color is a discretionary, trend-driven category with short replenishment cycles — when consumers feel poorer or platform traffic spikes in cost, color volumes fall before skincare. Yatsen's own history makes the cyclicality concrete: revenue compounded from ¥635M in 2018 to ¥5.8B in 2021 as Perfect Diary captured the Douyin and KOL boom, then contracted to ¥3.4B by 2023 when post-COVID Chinese consumer confidence weakened and platform traffic costs rose. Skincare is more defensive — the routine creates repurchase — which is why every listed Chinese beauty house is racing to shift mix into skincare.

The lesson from one cycle: a 65%+ peak-to-trough revenue range is plausible for a sub-scale digitally native brand operator, because both demand (consumer confidence) and supply economics (platform traffic cost) move against the brand owner in the downturn.

4. Competitive Structure

The structure is best understood as "fragmented and re-fragmenting." MarketScreener's published sector view shows L'Oréal at roughly ¥1.6 trillion in market cap, Shiseido at ~¥45 billion, Amorepacific at ~¥29 billion — and the entire listed Chinese cohort (Proya ¥27B, Chicmax ~¥21B, Yatsen ~¥1.9B) sitting well below the global majors but growing faster within China. Historical Kantar share data put Proya at 1.0% and Shanghai Jahwa at 1.9% of the China cosmetics market in 2017; even after a decade of growth, no single listed Chinese house holds more than mid-single-digit share of the China beauty market. That is structurally important: it means competition is brand-by-brand and category-by-category, not by aggregate scale, and it means a sub-scale player like Yatsen still has room to compound if it can find one or two hit brands.

The competitive dynamic that matters: domestic Chinese brands collectively captured nearly 60% of the China beauty market by 2025 (per a May 2026 Yatsen-cited CGTN figure), reversing the prior decade's foreign-brand dominance. Inside that domestic 60%, the fight is between Proya's scale-and-skincare playbook (95% online, ¥10.8B revenue, growing) and Yatsen's multi-brand-portfolio playbook (color heritage, skincare pivot, restructuring) — with Chicmax, Botanee and a long tail of private brands harassing both.

5. Regulation, Technology, and Rules of the Game

Three regulatory ideas the reader should hold onto. First, NMPA filing is a real moat — "special cosmetics" (sunscreen, whitening, anti-aging claims, anti-hair-loss) require pre-market registration with the National Medical Products Administration, with claims backed by science. That gates the fast-fashion model of throwing untested SKUs at Douyin. Second, the Livestreaming E-Commerce Measures (Feb 2026) materially raise the cost of the marketing playbook that built brands like Perfect Diary — pre-broadcast script and prop review, explicit liability for hosts and MCNs, and platform compliance review change the marginal economics of every livestream. Third, YSG is a Chinese VIE-structured Cayman holding company listed on the NYSE — HFCAA delisting risk, CSRC offshore-listing rules, and the residual uncertainty of the VIE structure are industry-wide for ADR holders and live in the discount rate, not the income statement.

Technology shifts that are reshaping the economics: AI-driven ingredient discovery and formulation (cited explicitly by Yatsen and dcfmodeling); biomimetic delivery systems (Biotec™, SmartLock™); microbiome-based actives; and the migration of demand generation from Tmall search to short-video discovery (Douyin, RedNote). Each shift rewards R&D and scientific credibility over trend-marketing.

6. The Metrics Professionals Watch

The two metrics that matter most: selling and marketing as a percent of revenue, and skincare revenue share. The first tells you whether the brand owner is being squeezed by platforms and KOLs (i.e., the cost of demand generation). The second tells you whether the portfolio is shifting toward the defensive, higher-margin, higher-repurchase category. A Chinese beauty company can fake operating leverage by skipping R&D or by capitalizing marketing, but it cannot fake these two ratios.

7. Where Yatsen Holding Ltd Fits

Yatsen is a sub-scale, multi-brand Chinese beauty house mid-way through a strategic pivot. It is not the industry leader (Proya is), not a moated incumbent (no Chinese beauty company is), and not yet a profitable masstige model (e.l.f. is the global proof point at $1.6B revenue and 4.5% operating margin). It is something narrower: a credible Chinese house with a portfolio bet on science-backed skincare and a few real hero SKUs, trying to grow into its cost base before the cycle turns again.

8. What to Watch First

If three or more of the first four signals turn positive in the same two-quarter window, the industry backdrop for Yatsen is improving and the equity story tightens around skincare share and marketing leverage. If signals five through seven move against the company — regulatory drag, delisting risk crystallizing, no SKU pipeline — the equity story stays a 2026-into-2027 cyclical recovery trade rather than a structural compounder.

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Know the Business — Yatsen Holding

Yatsen is an 11-brand Chinese beauty house spending two-thirds of its revenue on customer acquisition to capture the masstige skincare-and-color category online. The math only works when scientific skincare keeps mixing up: 78% gross margin gets rented back to Tmall, Douyin and the top livestreamers. The bottom line is improving sharply (net loss margin from -20.9% in 2024 to -2.2% in 2025 — [1]) but the equity story is not "compounder" — it is "is the FY22-FY24 reset done, and does the skincare pivot have a second leg?"

The market currently disagrees with management's answer. At ¥1.87B market cap and roughly ¥1.13B enterprise value after netting out cash, YSG trades at 0.4x EV/Sales for a business with a 78% gross margin that just printed its first non-GAAP profit and added Hillhouse as a convertible-note holder. That gap is the entire investment debate.

How This Business Actually Works

Yatsen designs and markets beauty brands. It does not manufacture: ODM/OEM partners — Cosmax (also a minority JV partner), Intercos, Kolmar, Shanghai Zhenchen — produce the inventory [2]. Yatsen owns the brand IP, the formulation patents, the consumer-data layer, the e-commerce storefronts, and the omni-channel marketing engine. The bulk of revenue is direct-to-consumer through Tmall, JD, Douyin, RedNote, Bilibili and Weixin, supplemented by offline experience stores and distribution through Sephora and The Colorist [3]. Cosmax also anchors a manufacturing-hub joint venture inside China [4].

The revenue engine is straightforward but the cost line tells the story.

Three points worth holding. First, the gross margin is real and rising — 73.6% → 77.1% → 78.2% over three years [5], driven by skincare mix and stricter discount discipline. ODM economics keep COGS at roughly one fifth of revenue. Second, the gross profit is rented from the platforms and the influencers. Selling and marketing absorbed 66.3% of revenue in 2025, after 66.9% in 2024 and 65.3% in 2023. That line includes performance-based platform fees on Tmall and Douyin, KOL commissions to top livestreamers (the company runs a large direct-to-KOL marketing network — see [6]), in-store payroll, and share-based comp for sales staff. It does not meaningfully come down without scale per brand. Third, the FY25 turn happened in G&A, not in the marketing line — payroll and SBC discipline cut G&A from 13.1% to 7.1% of revenue, the single largest contributor to the operating-margin improvement. The marketing engine was barely more efficient than 2024.

Bargaining power sits with platforms and consumers. Tmall and Douyin set the cost of traffic; consumers face zero switching friction. Yatsen earns back power only in three places: hero SKUs that drive repurchase (Perfect Diary Biolip Essence Lipstick using proprietary Biotec™; DR.WU Mandelic Acid Serum; Galénic No.1 Brightening Radiance Serum); proprietary actives and patents that gate the "special cosmetics" NMPA-regulated categories (sunscreen, whitening, anti-aging) [7]; and the Cosmax JV, which gives Yatsen physically-anchored manufacturing R&D inside China.

The Playing Field

Three things the table teaches. Yatsen has the cheapest revenue in the listed Chinese cohort by a wide margin — at 0.43x EV/Sales it trades at roughly one-sixth the multiple of Proya, Chicmax or Botanee, even though FY25 growth (+27%) tied or beat all three. The discount is partly profitability and partly governance — Proya, Chicmax and Botanee earn 10-20% operating margins on similar gross-margin profiles, while YSG is still operating-loss; layered on top is the NYSE-ADR / VIE / HFCAA structural discount that Chinese A-share and HK-listed peers do not carry. e.l.f. is the right global mirror, not L'Oréal or Estée Lauder — a profitable masstige DTC operator with 70.7% gross margin and 4.5% operating margin trading at 2.2x revenue. The number to underwrite is whether YSG can land within ELF's margin band; the rest is just multiple expansion.

The competitive dynamic that matters: Proya is the scale leader (~2.5x YSG's revenue, growing 21%) running a skincare-first multi-brand playbook with ~95% online mix. Chicmax is YSG's mirror — multi-brand digital-native, but profitable. Botanee owns the dermocosmetic niche (Winona, sensitive skin) that YSG is trying to attack through Galénic and DR.WU. Jahwa is the cautionary tale: a legacy multi-brand house failing to digitize and shrinking. None of these peers individually holds more than mid-single-digit share of the China beauty market. That fragmentation is what gives a sub-scale turnaround like YSG room to grow — but it also means there is no structural moat protecting any of them, including the leader.

Is This Business Cyclical?

Yes — moderately to highly. Cyclicality bites in three places at once: discretionary spending on color cosmetics, platform traffic costs (CPM and KOL commissions move with advertiser demand), and the working-capital cycle inside e-commerce festivals (618, Double 11) that concentrate Q2 and Q4 demand.

The historical record is concrete: revenue compounded from ¥635M in 2018 to ¥5.84B in 2021 (a 9.2x lift in three years — [8], [9]) on the back of Perfect Diary, the Tmall/Douyin platform shift, and the November 2020 NYSE IPO that funded the marketing engine. Then revenue contracted 42% peak-to-trough into FY24 as Chinese consumer confidence weakened and the cost-per-acquisition on platforms re-rated higher. Color cosmetics took the brunt: it lost share, while skincare's share of revenue rose from 33.5% in FY22 to 53.0% in FY25 not just from skincare growth but from color's absolute decline [10].

What makes this cycle different from a soft-drink cycle is that the supply side also moves against the brand owner: when consumer demand weakens, platform ad pricing tends to stay sticky on the way down while top-tier KOL commissions stay high, so gross-margin uplift cannot fully offset volume loss. That is why the FY22-FY24 operating losses persisted even as gross margin steadily rose from 67% to 77%.

The Metrics That Actually Matter

The chart above is the whole equity debate in two lines. Gross margin has climbed 10 points in three years — that is the skincare pivot working. But S&M intensity has not budged in three years. Until that second line bends down, gross-margin gains keep getting reinvested into the marketing line rather than dropping to profit. The non-GAAP profitability turn in FY25 came mostly from G&A discipline (payroll, SBC), not from marketing leverage. That is why bulls and bears disagree: bulls argue G&A discipline plus skincare mix is enough to compound into structural profit by FY27; bears argue that without a marketing-leverage step-down, this is just a less-bad turnaround and the cost of customer acquisition keeps the model below the line.

The metric that wins the argument over the next four quarters: skincare brand growth rate. FY25's +63.5% skincare growth was the catalyst. Holding that above 25% in FY26 — even as the comp gets harder — would do more for the equity story than any other single number, because it both lifts mix (gross margin proxy) and creates the operating scale that lets the marketing line de-lever as a percentage.

What Is This Business Worth?

This is best valued as one consolidated brand-house at an EV/Sales multiple anchored to peer profitability, not a sum-of-the-parts. The brands are not separately disclosed at the operating-profit level, share a common marketing engine and a common ODM/JV manufacturing base, and the consumer overlap across Perfect Diary / Galénic / DR.WU / Eve Lom is too high to credibly underwrite each brand at a standalone multiple. The right lens is what multiple deserves a 78%-gross-margin Chinese DTC house that just printed its first non-GAAP profit?

The valuation table reads as a series of conditional statements. The current 0.43x EV/Sales prices in a sub-Jahwa outcome — a declining, capital-impaired incumbent. Closing to Jahwa's multiple (~1.1x) requires nothing more than confirmation that FY25's revenue recovery is real (i.e., FY26 holds and modestly grows). Closing to Proya's multiple (~2.5x) requires Yatsen to do what Proya already did — durably hit 8-15% operating margin at scale. Closing to e.l.f.'s multiple (~2.2x) is the same trade in a different currency: it requires ELF-grade marketing discipline. The Hillhouse convertible at this market cap is the strongest single piece of evidence in the bull case — Hillhouse joined the ~$120M RMB-denominated convertible-note vehicle alongside Trustar Capital and CEO Jinfeng Huang in May 2026, with the notes carrying a 1.5% coupon and an initial 364-day maturity that extends to five years upon foreign-debt registration ([11], [12], [13]). But the convertible structure also caps the upside from any re-rating that comes.

Note what is not in the value-driver table: SOTP across brands, terminal P/E on FY27 EPS estimates, and any discrete asset-value claim. None of those work for this business. SOTP fails because brand-level profitability is not disclosed and the operating expense base is shared. Forward P/E fails because the company is just crossing into non-GAAP profitability with two-period visibility. Asset value matters only as a margin of safety — net cash + Galénic / DR.WU / Eve Lom acquired-asset book ¥538M of intangibles plus ¥155M goodwill is roughly half of current enterprise value, so downside is reasonably anchored, but no one buys this stock for the book value.

What I'd Tell a Young Analyst

Three pieces of advice and one warning.

One. Watch the skincare line and the marketing line together, not separately. Every quarterly release should be evaluated on two ratios: skincare revenue share (where is the durable franchise being built?) and selling-and-marketing as a percentage of revenue (is the engine actually scaling, or just running faster?). If skincare share moves above 55-60% and S&M drops below 60% in the same two-quarter window, the equity story tightens fast. If skincare grows but S&M stays sticky, you are watching a less-bad turnaround, not a compounder.

Two. Treat Galénic and DR.WU as the real franchise. Perfect Diary is the heritage and still 40%+ of revenue, but it is a defendable color brand in a category whose category economics are structurally worse than skincare. Galénic's No.1 brightening serum and DR.WU's mandelic acid lines are where pricing power, R&D credibility (Biotec™, ActiveAnchor™), and the China-dermocosmetic tailwind all converge. Track these two specifically — management calls out their growth rates in every release.

Three. Take the Hillhouse signal seriously but not religiously. Hillhouse joining the ~$120M convertible alongside the company's own buyback program [14] is the single most credible external vote on the turnaround. But Hillhouse has been an HHLR / Hillhouse Investment Management beneficial owner of Class A shares for years ([15], [16]) — this is incremental conviction, not new money discovering an unknown. The convertible structure also creates dilution that will be felt if and when the stock re-rates.

The warning. This is a Chinese VIE-structured Cayman holding company listed on the NYSE — the Cayman parent has no equity ownership in the China-operating VIE and relies on contractual arrangements [17]. The HFCAA / PCAOB / CSRC overhang [18] lives in the multiple permanently, not just at moments of stress. The 11-brand portfolio also has integration risk: management has already strategically phased out EANTiM [19], recorded significant Eve Lom goodwill impairments in 2023 and 2024 [20], and is mid-pivot on Perfect Diary's product positioning ("makeup skintification"). The bull case requires the marketing line to bend down at the same time the portfolio is being restructured — those two priorities frequently conflict at sub-scale beauty houses, which is the failure mode to monitor for.

References

1. FY 2025 20-F
2. FY 2025 20-F
3. FY 2025 20-F — Omni-channel Shopping Experience
4. FY 2025 20-F — Supply Chain and Quality Control
5. FY 2025 20-F
6. DRS 2020 — Marketing engine
7. FY 2021 20-F — Intellectual Property
8. FY 2020 20-F — Revenue by Channel R48
9. FY 2021 20-F — Revenue by Channel R49
10. FY 2025 20-F
11. Mar-26 6-K — convertible terms
12. May-26 6-K — Hillhouse co-investor
13. FY 2025 20-F — Subsequent Events
14. May-26 6-K — Hillhouse co-investor
15. 2022 SC 13G/A
16. 2023 SC 13G/A
17. FY 2022 20-F — Risks Relating to Our Corporate Structure
18. FY 2021 20-F — Risks Relating to Doing Business in China
19. FY 2024 20-F — Transformation Plan
20. FY 2025 20-F — Goodwill rollforward R46
21. FY 2024 20-F — Brand portfolio
22. FY 2023 20-F — Galénic / DR.WU
23. FY 2025 20-F — DR.WU acquisition
24. FY 2025 20-F — Eve Lom acquisition
25. FY 2024 20-F — Transformation Plan

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Financial Shenanigans — Yatsen Holding Ltd (YSG)

The Forensic Verdict

Yatsen is a Watch with two concentrated yellow flags and a generally clean cash-flow signature for a still-loss-making company. The forensic risk score is 38/100. The two issues that matter are (1) cumulative goodwill impairments on the FY2020–early-FY2021 skincare acquisition stack — ¥354.0M in FY2023 and ¥403.1M in FY2024, concentrated in the Eve Lom reporting unit — which were disclosed correctly but reveal the price paid for the strategic pivot was too high ([1]; [2]; [3]); and (2) growing related-party inventory and service purchases from companies over which Yatsen "exercises significant influence" [4]. Offsetting these: the FY2022 SDNY securities class action filed in 2022 was dismissed with prejudice in 2025 and the case closed [5], DSO has collapsed from 88 days (FY2018) to 19 days (FY2025) with receivables actually shrinking on a 27% revenue jump, internal controls over financial reporting were assessed effective as of year-end [6], and FY2025 CFO landed essentially at GAAP net loss — i.e. zero accrual gap. The data point that would most move the grade is whether the next two years of related-party purchase disclosure show the same scale and counterparties, or whether the dollars migrate to Mr. Huang's directly-controlled vehicles (which would push this into Elevated).

Breeding Ground

The breeding-ground profile is founder-dominated but professionally audited, which is the most common configuration for a Chinese ADR after a wave of accounting scandals. The dual-class structure giving Class B shares 20 votes versus 1 for Class A is set out in the company's Memorandum of Association ([7]; [8]). Two structural items raise the baseline risk; three offsets dampen it.

The breeding ground does not amplify the accounting findings the way a typical fraud setup would: there is no streak of meeting-beating, no aggressive guidance culture (management has guided cautiously since FY2022), no auditor change, no late filing, and no internal-control deficiency — management opined ICFR effective at FY2022 and again at FY2024 ([9]; [10]). Bonnie Yi Zhang was named audit committee chairwoman and Alan Hao Zong was appointed independent director per the Mar-26 board change disclosure [11]. The Nov 2023 NYSE non-compliance letter (ADS below US$1 average for 30 consecutive trading days) is on file [12]; an earlier round in 2022 was cured by August [13]. The dual-class voting structure means independent directors cannot vote Mr. Huang out, but they can — and have — kept the audit and reporting machinery in good order. The reader's appropriate posture: assume capital allocation decisions (acquisitions, buybacks, related-party arrangements, the new convertible notes deal) reflect the founder's view, not the consensus of a balanced board.

Earnings Quality

Earnings quality is better than the loss line suggests because the operating loss has been carrying a heavy load of non-cash and non-recurring charges — goodwill impairments and intangibles amortisation primarily — that are properly disclosed and now tapering. FY2025 had no goodwill impairment, and the gross-margin path (63% → 78%) is corroborated by the documented mix shift from Color Cosmetics (lower margin) to Skincare Brands (higher margin), not by pricing aggression.

The goodwill stack tells a coherent — and unflattering — story. Yatsen acquired Galénic, the mainland China business of DR.WU and Eve Lom in late 2020 / early 2021 [14], taking goodwill from ¥21M to ¥869M and intangibles from ¥189M to ¥746M in a single year. By FY2023 management began testing the Eve Lom reporting unit and recorded RMB354.0 million (US$49.9 million) of goodwill impairment [15], then a further RMB403.1 million (US$55.2 million) in FY2024 [16]. The FY2025 goodwill rollforward confirms zero further impairment and a remaining goodwill balance against the DR.WU reporting unit [17]. This is a trickle big-bath — split across two years against shrinking revenue — rather than a single shock, which is the harder pattern to time but the more honest accounting outcome. There is no evidence that operating margins were polished by stripping costs into the impairments; the SG&A ratio, fulfilment ratio, and gross margin all moved monotonically and explicably.

The non-cash adjustment burden was ¥415M in FY2023 and ¥516M in FY2024 — about 12% and 15% of revenue, respectively — and collapses to ¥62M (1.4%) in FY2025 as the goodwill is largely gone and intangibles amortisation steps down (the Eve Lom intangibles are now nearly fully amortised; only ¥42.7M was charged into selling and marketing in FY2025 vs. ¥106.4M in FY2024 per the MD&A). This is the engine of the reported FY2025 turnaround: the headline operating loss contracted from −¥825M to −¥186M, and roughly ¥460M of that ¥640M improvement is the absence of the prior-year goodwill charge plus the ~¥65M drop in intangibles amortisation. The skincare brand growth (+63.5% YoY) is real and segment-level losses did narrow, but the FY2025 inflection is majority a non-cash-charge tailwind, which has to be flagged for investors using the slope of earnings to extrapolate.

Receivables and revenue tell the cleanest story on this page.

DSO improved from 88 days in FY2018 (an outlier because of the small revenue base) to a tight 19 days in FY2025 — consistent with a DTC channel mix that recognises revenue at delivery and collects through the e-commerce platform. There is no evidence of selling to channel to dress quarter-end. DIO, by contrast, has been steadily worse since FY2020 and reached 198 days in FY2025 — high for a fast-moving beauty business and inconsistent with the marketing message that Skincare is selling through. Inventory grew ¥123M (+32%) in FY2025 against a +27% revenue lift, so it is not unambiguously stale yet, but management's own MD&A flags an "increase of RMB125.1 million in inventories" as the largest single working-capital drag on FY2025 CFO. Watch this in the FY2026 numbers — if DIO crosses 220 days without a coordinated promotional reset, an inventory write-down becomes a real possibility.

Cash Flow Quality

Operating cash flow has been negative every year since IPO except FY2022 and FY2025 conversion was essentially identical to net income — −¥95M CFO vs. −¥92M net loss, an accrual ratio of 0.4 bps of average assets. There is no evidence of CFO inflation; if anything, the company is owning the cash loss rather than managing toward it.

Two cash-flow vignettes deserve attention. First, FY2019 (pre-IPO) showed ¥75M of net income but −¥6M of CFO — a classic earnings-without-cash signal that was central to the now-dismissed Maeshiro complaint. The court was unpersuaded the gap rose to securities fraud; it does, however, document that the IPO was priced on earnings that did not generate cash. Second, FY2022 was the only positive-CFO year (+¥136M) — but revenue fell 37% that year and the cash came from a ¥272M inventory drawdown plus the ¥341M SBC non-cash add-back. That is working-capital release during a contraction, not durable cash generation. By FY2023 CFO was back to −¥107M, and the working-capital lifeline has not recurred.

There is no factoring, no supplier finance, no recourse receivable arrangement, no bill-and-hold and no acquisition working-capital trick in the disclosures. The cash flow statement itself is a clean reconciliation from net loss through depreciation, amortization, share-based compensation, impairment charges and changes in working capital [18]. The most aggressive cash-flow item is the use of short-term investments as a cash management buffer — FY2025 investing CF was +¥247M because Yatsen sold ¥888M of short-term financial products to fund operations and buybacks while purchasing ¥602M of fresh ones. This is mechanical, transparent, and correct under US GAAP, but it means investing-line CF in the FY2024-25 window includes ~¥3B of inter-bank cash rotation that visually flatters the bottom line of the cash-flow statement.

Free cash flow has been negative every year since FY2018 with the single exception of FY2022. FY2025 FCF was −¥137M against −¥81M net loss; the ¥56M gap is capex (¥42M) plus the inventory build (¥123M). Acquisition-adjusted FCF (FCF minus acquisitions) is identical to FCF because there were no acquisitions in FY2023-25.

Metric Hygiene

Management has been conservative on non-GAAP for a still-loss-making business. The headline non-GAAP EPADS Yatsen reports excludes share-based compensation and intangibles amortisation, and Q4 FY2025 was +US$0.07 versus GAAP loss — but Yatsen consistently reconciles the non-GAAP figures in earnings releases and the gap is shrinking because both adjustments are shrinking organically. Segment reporting (Color Cosmetics Brands, Skincare Brands, others) reconciles segment net revenues and income (loss) from operations to consolidated totals with an unallocated line [19].

Two non-GAAP-adjacent observations. First, SBC of ¥1.9B in FY2020 (36% of revenue) is the dominant non-cash item in the IPO-year loss and reflects vesting of pre-IPO option grants triggered by listing. By FY2025 SBC has compressed to ¥59M (1.4% of revenue), well within normal for a public consumer company. Second, Yatsen has spent ¥1.5B on share buybacks while losing ¥4.6B of net income across FY2022-25, retiring approximately 26% of total ordinary shares since the IPO. Buying back stock during a loss is reasonable if the stock is undervalued and the balance sheet is funded, both of which apply, but it converts ¥1.5B of cash equity into a smaller share count rather than cushioning the operating cash burn — which is one of the reasons cash went from ¥5.7B (FY2020) to ¥1.0B (FY2025). The new March 2026 US$120M convertible notes deal partly reverses this with new dilutive paper.

What to Underwrite Next

Five concrete items for the FY2026 20-F or any pre-print 6-K disclosures:

1. Related-party purchases over ¥372M (FY2025). Track whether the line grows again, whether the counterparties move from "companies over which we exercise significant influence" toward "company controlled by our chief executive officer" (a distinction the disclosure already makes — see [20]), and whether the joint-venture financial guarantee is called [21]. Item 7 disclosure is the only place this appears — read it first. The signal that would downgrade the grade to Elevated: counterparty migration to founder-controlled vehicles, or the line crossing 50% of cost of revenue.

2. DIO and inventory write-down. FY2025 closed at 198 inventory days, with FY2025 inventory build of ¥123M cited as the single largest CFO drag. If FY2026 ends above 220 days and gross margin compresses, expect an inventory write-down inside FY2026 cost of revenue. Compare the inventory dollar growth to revenue growth at every quarter.

3. Goodwill at ¥155M. Eve Lom-related goodwill has been written down twice. Galénic and DR.WU goodwill components remain. If Skincare Brands revenue growth decelerates below 20% in FY2026, run the Yatsen impairment test sensitivity on the remaining ¥155M — a third impairment would be a stronger pattern than two.

4. Hillhouse / Trustar / founder US$120M convertible notes. The convertible-notes private placement (RMB-denominated, ~US$120M aggregate in two tranches, with Trustar Capital and CEO Jinfeng Huang) was announced March 11, 2026 [22]; the first tranche closed May 21, 2026 with Hillhouse affiliates joining as co-investors [23]. Watch the second-tranche closing date, the conversion price, the warrants' strike, and whether the founder's economic stake increases enough to alter the dual-class voting balance. Conversion mechanics and any change-of-control trigger language matter.

5. Operating cash flow inflection. FY2025 CFO of −¥95M was essentially equal to net loss — there is now no accrual cushion left. For FY2026 to print positive CFO, either gross margin needs to hold above 78% on revenue growth that exceeds inventory growth, or working capital must release. The clean test: does CFO turn positive without a one-time benefit?

The signal that would upgrade the grade to Clean: two consecutive quarters of positive GAAP operating income, related-party purchases stable in absolute dollars, and DIO back below 150 days. The signal that would downgrade to Elevated: a third Eve Lom impairment, an inventory write-down disclosed in cost of revenue, or an enlarged convertible-notes facility in which the founder takes the majority of the paper.

Bottom line: the accounting risk at Yatsen is a position-sizing limiter, not a thesis breaker. The reported FY2025 inflection is supported by the cash-flow statement only weakly — most of the optical improvement is the absence of two years of goodwill impairments — but the underlying gross-margin and channel disclosures are credible, the receivable signal is clean, and the largest single legal overhang (the IPO class action) has been dismissed with prejudice. A long position should haircut FY2026 GAAP earnings power for the ¥130-150M of recurring SBC + intangibles amortisation + inventory true-up risk, and cap position size to reflect that one shareholder controls 90.7% of votes and 100% of the equity-incentive plan administration.

References

1. FY 2023 20-F — Eve Lom impairment
2. FY 2024 20-F — Eve Lom impairment
3. FY 2025 20-F — Goodwill rollforward R46
4. FY 2025 20-F — Related Party Transactions
5. FY 2025 20-F — Commitments and Contingencies R33
6. FY 2024 20-F — Management's Report on ICFR
7. 2020 DRS/A — Memorandum of Association
8. FY 2025 20-F — Share Ownership / Voting Rights
9. FY 2022 20-F — Management's Report on ICFR
10. FY 2024 20-F — Management's Report on ICFR
11. Mar-26 6-K — Board changes
12. Nov-23 6-K — NYSE Non-compliance
13. Aug-22 6-K — Regained NYSE Compliance
14. FY 2024 20-F — Eve Lom acquired March 2021 from Manzanita Capital
15. FY 2023 20-F — Eve Lom impairment test
16. FY 2024 20-F — Eve Lom impairment test
17. FY 2025 20-F — Goodwill rollforward R46
18. FY 2023 20-F — Consolidated Cash Flow Statement R8
19. FY 2023 20-F — Segment Information R33
20. FY 2022 20-F — Related Party Transactions R28
21. FY 2023 20-F — Commitments incl. JV financial guarantees R99
22. Mar-26 6-K — Convertible Notes Announcement
23. May-26 6-K — Hillhouse Co-Investor / First Tranche Close

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The People

Yatsen earns a C+ on governance: deep founder skin-in-the-game and a credible audit chair, dragged down by a 20:1 dual-class structure that hands the founder 90.7% voting power [1], an expanding ledger of related-party purchases (now ¥372M / 9% of revenue), and a March 2026 ~$120M convertible-plus-warrants struck with a vehicle affiliated with the CEO [2].

The People Running This Company

Five names matter. The founder still runs the show; the CFO is a US-capital-markets veteran; the CSO is the technical credential the brand needs. Roster, ages, and committee assignments below are from the most recent [3] plus the [4] reporting the board change.

The credentials are real, not cosmetic. Yang spent nine years as CFO of a much larger NYSE-listed Chinese consumer business (Vipshop) and was added to the XPeng board the same month he joined Yatsen — he is the bridge between Guangzhou operations and Wall Street capital. Cheng's Estée Lauder pedigree is the kind of hire a brand needs when the pitch is "science-backed Chinese beauty" — she sat as VP APAC R&D at the world's largest skincare house before joining in 2023. Zhang is the strongest independent: a former Deloitte SEC-services partner now running finance at one of China's defining internet companies, and she chairs both the audit and compensation committees.

The new wrinkle: Sidney Xuande Huang (no relation, unrelated independent) resigned on February 28, 2026 "for personal reasons" and Alan Hao Zong was seated the same day, with Bonnie Yi Zhang re-designated as audit chairwoman [5]. Same-day swaps deserve a raised eyebrow. Zong's CV — Alibaba Investment, Capital Today, P&G — looks investor-class, but he is brand-new and unproven on this board.

What They Get Paid

Cash compensation is unusually small for a NYSE-listed company. The story is told in equity grants and trust transfers, not paychecks.

For perspective: the CEO of a NYSE-listed beauty company globally earns $5-50M per year in total comp. Yatsen pays its entire executive team a combined ¥7.5M (~$1.1M) in cash [6]. This is either a discipline signal — Huang owns 34% of the equity and 90% of the votes, so he gets paid via the share price, not the paycheck — or a sign that base salaries have been deliberately suppressed to make the equity story cleaner. Either way, there is no Disney-style golden parachute to fund here.

Equity is the real number, and even there ¥59M ($8.4M) of SBC is modest against ¥4.3B of revenue (~1.4%). Outstanding options on directors/executives total only 14.8M ordinary shares — roughly 0.74M ADRs at the 20:1 ratio. The dilution overhang from the named executive option grants is trivial in ADR terms.

Are They Aligned?

This is the central question. Yatsen has every formal marker of alignment — heavy insider economics, an aggressive buyback program, modest cash pay — and several real concerns underneath them.

Ownership and voting control

The gap is the whole story. Huang owns 34% of the equity but casts 91% of the votes; the public float owns 35% of the equity but casts 5% of the votes. Hillhouse — Yatsen's anchor pre-IPO investor and a sophisticated $100B+ Asia fund — holds 13.8% economic for just 1.9% voting power [8]. Any shareholder revolt would require the CEO to vote against himself. He will not.

This structure is legal — every Chinese ADR with a founder uses some variant — but the multiplier matters: at 20 votes per Class B share [9], Yatsen's super-voting ratio is in the high tier (Alibaba uses partnership voting; JD uses 20:1; Meituan 10:1). The 91% voting share means proxy contests, take-private offers, board removals, and amendment votes are not a real check.

Buybacks vs. dilution — the share count tells the story

ADRs outstanding peaked at 126.3M post-IPO (2020-21) and have been bought back to 93.9M (2025) — a roughly 26% net reduction in ADRs over four years, financed by ~$1.9B of cumulative repurchases (program authorized [10], then upsized to US$150M in [11] and to US$200M / November 2025 per the [12]). Few unprofitable companies return that much capital to shareholders. The catch: most of the buying happened at $5–$15 per ADR; the stock now trades around $3. The buybacks shrank the float meaningfully but destroyed substantial value at higher prices.

A second nuance: the ADS ratio itself was [13] (a 1-for-5 ADS reverse split). Historical ADR counts above are on the post-split basis.

The trust complication: 79.2M Class A ordinary shares are held through two trusts "for the benefit of employees, directors and officers" — these get released as service conditions vest. So the float-shrinking buybacks need to be netted against trust-based vesting. Yatsen reports SBC of only ¥59M in 2025, suggesting the trust drawdown is now small.

Related-party transactions — the line that won't stop growing

The Trustar convertible — the single most material event of 2026

Skin-in-game score: 8/10

Net: 8/10. The founder has roughly $1.75B at risk at the current price and has funded a buyback program that materially shrinks the float. The deductions reflect the structural points: super-voting locks shareholders out of consequence, and the related-party + Trustar deals are the kind of "owner-friendly" capital allocation that doesn't always treat minority holders the same way.

Board Quality

Three independent directors, two insiders. Formally 60% independent. Three committees, all chaired by independents. The substance is better than the structure suggests.

The substantive grade is better than the dual-class voting suggests. Bonnie Yi Zhang is a genuinely strong audit committee chair — a former Deloitte partner specializing in SEC services for foreign private issuers is precisely the right CV for this seat, and she also chairs comp. Jiming Ha is an unusually senior independent voice for a $250M company: a former IMF economist, ex-Goldman Sachs Asia MD, and CICC chief economist would be a routine appointment at a large-cap, not a small-cap. The weakness is that with only three independents, the same people sit on every committee — the audit, compensation, and nominating committees are essentially the same three people in different rooms.

The Verdict

Governance grade: C+

The strongest positives

• Real founder skin-in-the-game: ~$1.75B of personal equity at risk; cash compensation is rounding error against the equity position.
• Buybacks have shrunk the share count by ~26% from peak, financed by $1.9B of cumulative repurchases. Few unprofitable companies have returned that much capital.
• An audit committee chair (Bonnie Yi Zhang) whose CV — Deloitte SEC-services partner, then Weibo/Sina CFO — is the right credential for the seat. A nominating chair (Jiming Ha) of unusual seniority for a company this size.
• Hillhouse stayed in. ZhenFund stayed in. Sophisticated long-term capital has not walked away.

The real concerns

• 20:1 super-voting Class B leaves the founder with 90.7% voting on 34.3% economics. Minority shareholders are along for the ride.
• Related-party purchases growing from ¥211M → ¥285M → ¥372M with no disclosed independent fairness review.
• The March 2026 $120M convertible-plus-warrants struck with a vehicle the CEO is affiliated with is the single most consequential governance event of the cycle.
• CEO is the named administrator of both equity plans.
• Same-day swap (Feb 28, 2026) of Sidney Xuande Huang for Alan Hao Zong with only "personal reasons" disclosed.
• Foreign Private Issuer status removes Form 4 / Section 16 visibility into ongoing insider trades.

The single thing that would move the grade

• Upgrade to B/B+: the audit committee discloses an independent fairness opinion on the Trustar convertible (the headline terms are in the [19]; what is still missing is third-party validation that the package was market-tested), and the related-party purchase line plateaus or shrinks in FY26.
• Downgrade to C/C-: the related-party line keeps growing toward ¥500M+, or the CEO-affiliated convertible is repriced (lower conversion or lower warrant strike) on terms more favorable than what was available to outside holders.

References

1. FY 2025 20-F
2. March 11, 2026 6-K
3. FY 2025 20-F
4. March 2, 2026 6-K
5. March 2, 2026 6-K
6. FY 2025 20-F, Item 6.B
7. 2022 SIP, 6-K Dec 30, 2022
8. FY 2025 20-F, Major Shareholders
9. SC 13G/A, Feb 2024
10. November 2021 6-K
11. August 2022
12. FY 2023 20-F
13. changed from 4:1 to 20:1 in March 2024
14. FY 2025 20-F, Related Party Transactions note
15. 2020 DRS, Note 9 / Note 22
16. March 11, 2026 6-K
17. May 21, 2026 6-K
18. FY 2025 20-F subsequent-events footnote
19. 20-F subsequent-events note

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The Narrative Arc

Yatsen's story has three chapters, and management is currently writing the third. Chapter one (2016–2020) was hypergrowth on the back of one brand, Perfect Diary, sold through China's KOL-and-Tmall machine, ending at a [1] at the peak of the China DTC bull market. Chapter two (2020–2022) was an acquisition splurge ([2]; DR.WU mainland China, Eve Lom, EANTiM added in 2021) and a humbling reality check: COVID, zero-COVID, the collapse of brand-building economics, and a ¥2.7B post-IPO loss. Chapter three began in early 2022 with a self-declared "five-year strategic transformation plan" that has, four years in, delivered on almost every quantifiable promise — skincare mix from 33.5% to [3] — at the cost of one badly stranded acquisition (Eve Lom, impaired twice for a combined ¥757M — [4] and [5]). The current CEO and Chairman, founder Jinfeng Huang, has held the seat since [6]. Same person founded the business, IPO'd it, broke it, and rebuilt it.

The financial signature of each chapter

Two facts dominate the chart. First, revenue topped out in 2021, fell by a third in 2022, stayed flat for two years, then re-accelerated in 2025. Second, the net loss margin has improved every single year since 2020 — from 51.3% to 26.5% to 22.2% to 22.0% to 20.9% to 2.2%. The 2025 print is the closest Yatsen has been to breakeven since 2019. The headline that "Yatsen lost money for the sixth straight year" is technically true and analytically misleading; the slope is the story.

What Management Emphasized — and Then Stopped Emphasizing

The vocabulary of the annual reports tells you the strategy more honestly than any press release. Here is what they kept talking about, and what they quietly stopped.

The shape on the heatmap is the entire pivot.

Loud-then-quiet: Experience stores went from a five-bell drum in 2020–2021 (the network ballooned to 294 stores) to a footnote in 2023–2025 (down to 77). Acquisitions went from headline content in 2020–2021 to silence in 2025 — there have been zero M&A transactions disclosed since 2021. EANTiM, the 2021 microbiome brand trumpeted as "an emerging field," is now matter-of-factly described in the [7]. The brand never appears in the new portfolio map. (Separately, Abby's Choice was [8].)

Quiet-then-loud: "R&D" was a sub-percent line item in 2018–2020 (¥2.6M in 2018, 0.4% of revenue). By 2022 it was 3.4% and headline content. By 2025, the filing devotes pages to a "1-3-4-6-20 global technology framework," a [9], plus IFSCC presentations and the peer-reviewed publication of the Galénic Vitamin C study. The reframe from China DTC brand to scientific beauty group is the most strategically meaningful vocabulary shift in Yatsen's history.

The phrase "strategic transformation" appears zero times in 2020 and 2021 filings. It is the organizing concept of every filing from 2022 onward. When a company invents a phrase and then repeats it across four reports, it is signaling that this is the story it wants to be measured against.

Risk Evolution

The risk-factors sections are where management has to enumerate what could go wrong. The mix has shifted as much as the business model.

Three patterns stand out.

COVID has gone to zero. In 2020 it was the dominant business risk; by 2025 it is gone from the disclosure entirely. The supply-chain and store-closure language that COVID forced into the filing has been quietly replaced by language about scientific authority, R&D scaling and Shanghai labs. That is appropriate — but it is also worth noting that some of what management once called "COVID effects" (collapsing color cosmetics demand, channel productivity drops) are turning out to be more structural than transitory.

M&A risk now reads as M&A regret. The [10] and [11] devote new and substantially longer language to goodwill impairment, fair-value testing and reporting-unit performance — directly mirroring the consecutive Eve Lom write-downs. In 2025 that language softens but does not disappear, suggesting management still considers further impairment a live possibility.

The VIE / HFCAA paragraphs got dramatically longer in 2022–2023 as the PCAOB-Chinese auditor standoff peaked, then began to recede. They have not been removed (see the [12] where the SEC staff required Yatsen to substantially expand HFCAA and VIE disclosure). A reader who skipped the 2022 filing and went straight to 2025 would underweight how close the listing came to political risk.

How They Handled Bad News

There were three real bad-news moments in Yatsen's public life. The pattern is more disciplined than the timing of the impairments suggests.

The 2020 net loss of ¥2.69 billion (51.3% of revenue). Management explained this in three buckets in the [13]: COVID-driven demand softness, marketing burn on new brands (Little Ondine, Abby's Choice), and ¥1.84 billion of share-based compensation tied to the November 2020 IPO — most of which was a one-time GAAP recognition event. The filing was unusually clear about which bucket was which, and the SBC line did substantially shrink in subsequent years. This was honest disclosure. The reader could separate the durable problem (marketing burn) from the cosmetic one (IPO accounting).

The 2021–2022 revenue collapse. Revenue did not collapse in one period — it slid from a 2021 peak of ¥5.84B to [14]. The 2022 filing attributed this primarily to "zero-COVID policy continued to negatively impact consumer sentiment and demand for social gatherings, [where] the color cosmetics market faced prolonged headwinds." That is part of the truth. The harder truth — that the Perfect Diary KOL-DTC model had simply matured and that customer acquisition economics had broken — was implied but not stated directly. Management's response was the right one (the strategic transformation plan) even if the diagnosis was softer than the reality.

The Eve Lom impairments. [15], then [16] — a cumulative ¥757M write-down on a single 2021 acquisition. The 2024 disclosure language is plain: "Revenue of Eve Lom units did not meet our expectations and therefore our short and long term forecasts for Eve Lom were revised downwards with an adverse impact on future expected cash flows." No deflection, no special-charge framing, no segregation as "non-recurring." Two consecutive impairments are a real-world admission that the original deal thesis was wrong. The [17] — meaning either the brand has stabilized at its now-marked-down carrying value or further write-downs may still come.

Guidance Track Record

Yatsen does not issue numerical guidance the way a US large-cap does. What it issues is something more interesting — and more falsifiable — a multi-year strategic plan with named targets. The five-year transformation plan announced in early 2022 has effectively been the company's only enforceable promise to public shareholders [18]. Here is how it has scored.

The credibility score is 8 out of 10. Of the six concrete commitments in the 2022 plan, all six have been delivered — with the gross margin and net loss margin outcomes substantially better than what the plan's language implied. The single haircut is Eve Lom: a 2021 acquisition that was promoted as a prestige skincare anchor and ended up generating ¥757M in cumulative goodwill write-downs across 2023–2024. Some readers will dock more for this; the case for not docking more is that management did not hide it, took both impairments as soon as the tests required, and the rest of the M&A vintage (Galénic, DR.WU) is now demonstrably working — Galénic and DR.WU are the engines of the 63.5% skincare revenue surge in 2025.

What the Story Is Now

The current story is the cleanest Yatsen has ever had, and it is also the narrowest one the company has ever told [19].

What has been de-risked. The 2022 plan has been executed. Margin structure is no longer the problem — 78.2% gross and a 2.2% net loss margin are an entirely different business from the one that lost ¥2.69B in 2020. The skincare mix shift is real, not a slide — it is reflected in segment revenue [20]. The marketing burn is more disciplined; S&M as a percent of revenue has stabilized at ~66% versus 68.6% in 2021. The R&D positioning is no longer a slide either — Shanghai lab, Cosmax manufacturing hub, peer-reviewed publication of brand technologies, IFSCC presentations. Eve Lom is impaired but not yet written off entirely.

What still looks stretched. Revenue, even after a strong 2025, is below the 2021 peak (¥4.30B versus ¥5.84B). Color cosmetics — once 94% of revenue, now 46.7% — has been roughly flat for three years; the Perfect Diary repositioning around "skintification" is real product work but the brand is not yet visibly reaccelerating outside the Biolip line. The S&M ratio of ~66% would be considered uneconomic in any Western beauty group; either it compresses materially or operating profitability remains structurally hard to reach. And the entire business still depends on the Chinese consumer, the Tmall-Douyin-RedNote stack, and a VIE structure on a US exchange.

What the reader should believe vs. discount. Believe: the financial transformation is real and verifiable in the segment data. The margin progression is not an accounting story. The R&D commitment is reflected in capex and lab footprint, not just words. Galénic and DR.WU are working. Discount: the framing that 2022's revenue collapse was primarily a COVID story (it was partly that, partly the maturing of the Perfect Diary playbook), and the residual confidence in Eve Lom (two impairments in two years is a brand that has not yet found its footing under Yatsen ownership). The 2026 question is no longer "can they fix the margin." It is "can they grow revenue without breaking the margin." Stan's verdict tab is where that bet gets sized.

References

1. NYSE IPO on November 19, 2020
2. Galénic acquired October 2020
3. 53.0%, gross margin from 68.0% to 78.2%, net loss margin from 22.2% to 2.2%
4. ¥354M in FY2023
5. ¥403M in FY2024
6. 2016
7. FY 2025 20-F as "strategically phased out"
8. phased out in 2023
9. Shanghai global R&D center, the Cosmax Guangzhou manufacturing hub, and the "Beauty Innovation Insight" report
10. 2023
11. 2024 risk-factors sections
12. July 2022 SEC correspondence
13. Q4 2020 6-K
14. ¥3.71B in 2022 (-36.5%)
15. ¥354M in 2023
16. ¥403.1M (US$55.2M) in 2024
17. FY 2025 20-F reports zero impairment
18. FY 2024 20-F describes the plan and reports 2022–2024 progress against it
19. FY 2025 results: 78.2% gross margin, +26.7% revenue growth, net loss narrowed 87.0% to ¥92.4M
20. skincare grew 63.5% to ¥2.28B, 53.0% of full-year revenue

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Financials — What the Numbers Say

Financials in One Page

Yatsen is a ¥4.3 billion (FY2025) China-based masstige beauty group that is most of the way through a brutal four-year reset. Revenue collapsed 42% from the FY2021 peak (¥5.84B) to the FY2024 trough (¥3.39B), then re-accelerated 26.7% in FY2025 as the Skincare brands took the wheel from Perfect Diary [1]. The headline story under the headline: gross margin expanded from 63% in FY2018 to 78.2% in FY2025, and the operating loss collapsed from –¥2.7B in FY2020 to –¥186M in FY2025. The company still does not generate free cash flow — FY2025 FCF was –¥137M — but it sits on ¥1.0B of cash with effectively no operating debt, has bought back 26% of its shares since 2022, and printed its first positive quarterly net income in years in Q4 FY2025 [2]. The reset, however, is not finished: Q1 FY2026 reverted to a –¥61.9M net loss on –¥99.0M operating loss, which is the single most important data point in this report [3].

The question the financial statements have to answer is whether the FY2025 inflection is the start of durable profitability or a temporary mix tailwind that fades as the company spends to keep Skincare growing. Everything that follows tries to give you the evidence to answer it.

Revenue, Margins, and Earnings Power

Revenue (the value of products and services sold before any costs) is the top line of the income statement. For Yatsen, revenue is almost entirely sales of color cosmetics (Perfect Diary, Little Ondine, Pink Bear) and skincare (Galénic, DR.WU mainland China, Eve Lom, Abby's Choice). Gross margin (revenue minus the direct cost of producing the goods, divided by revenue) tells you how much pricing power the brand has after manufacturing.

The revenue chart tells three distinct stories. The IPO-era rocket ship (FY2018–FY2020) was Perfect Diary leveraging Xiaohongshu / Douyin and a viral KOL marketing playbook. The crash (FY2021–FY2024) was a combination of China consumer slowdown, a massive correction in color-cosmetics sentiment as the Chinese consumer moved to skincare and "C-beauty" national champions, and Yatsen's own decision to walk away from money-losing marketing intensity. The reacceleration (FY2025: +26.7%) is the Skincare segment — Galénic, DR.WU, Abby's Choice — pulling the whole house forward.

The margin chart is the cleanest "look here" image in the report. Gross margin has improved every single year since FY2019, climbing from 63.6% to 78.2% — a 14.6 percentage-point gain driven by mix shift toward Skincare (which carries materially higher gross margin than mass-market color cosmetics) and the deliberate exit from price-promotional Perfect Diary SKUs [4]. Operating margin tells the harder truth: even as gross profit improved, selling, general & administrative expense (SG&A) ran wild during the influencer-marketing peak (114% of revenue in FY2020, 92% in FY2021). The collapse from –51% to –4.3% operating margin is the company learning how to spend less per yuan of revenue. SG&A as a percent of revenue fell to 79.3% in FY2025 from 86.3% in FY2024 — the first meaningful step down in four years [5].

Quarterly trajectory — what FY2025 actually proved (and what Q1 FY2026 just complicated)

The quarterly pattern is decisive. Each of the four FY2025 quarters narrowed the operating loss versus the same quarter of FY2024, and Q4 FY2025 came within ¥13M of operating breakeven (and ¥8M of net-income breakeven) [6]. Then Q1 FY2026 widened the operating loss back to –¥99.0M and the net loss to –¥61.9M [7]. Bulls will call this a marketing-timing artifact (Q1 is a 6.18 / pre-618 pre-launch quarter for Chinese beauty); bears will call it the limits of operating leverage at this revenue base. We do not yet know which is right.

Cash Flow and Earnings Quality

Free cash flow is the cash a business has left over after running its operations and reinvesting in equipment. The clean version: operating cash flow minus capex. If the income statement shows profits but free cash flow does not, the profits are not real cash you can pay out, reinvest, or buy back stock with. For Yatsen, the gap between net income and free cash flow is the single most uncomfortable feature of the financial statements.

Three things stand out. First, in seven of the last eight fiscal years, Yatsen consumed cash at the operating line — the lone exception was FY2022, when aggressive working-capital squeezing (inventory destocking after the FY2021 sales collapse) produced ¥85M of positive FCF that was not repeatable. Second, the FY2025 cash burn (–¥137M) is worse than the reported net loss (–¥81M), the inverse of what you want from a company claiming to be inflecting — Skincare growth is being funded partly by inventory build (inventory rose 31.8% YoY from ¥386M to ¥509M per the FY2025 balance sheet) and the company still pays sizable stock-based compensation [8]. Third, the absolute size of the burn has compressed dramatically — FY2020 burned ¥1.2B of free cash; FY2025 burned ¥137M — so the runway question is no longer existential at the current pace.

Reconciling earnings to cash — what eats the difference

D&A (depreciation and amortization — a non-cash expense from the prior accounting writedowns of property, equipment and acquired brand intangibles) added back ¥146M in FY2025. SBC (stock-based compensation — shares issued to employees, expensed but not cash) added back ¥59M; that is 1.4% of revenue, far healthier than the FY2020 peak of 36.3% of revenue but still a real cost to shareholders [9]. Capex is tiny (¥42M, under 1% of revenue) — Yatsen is asset-light and does not need a manufacturing plant. The cash that actually left the company in FY2025 was ¥111M of buybacks, much more than the FCF outflow.

Balance Sheet and Financial Resilience

A balance sheet's job is to tell you what the company owns, what it owes, and what is left for shareholders. For a company that has lost money seven years out of eight, the balance sheet is the only reason the business is still standing.

Yatsen IPO'd in November 2020 [10] and ended FY2020 with ¥5.73B of cash and restricted cash, half its market cap at the time. That cash hoard has financed five consecutive years of losses, brand acquisitions (Galénic, DR.WU, Eve Lom mainland China), and aggressive buybacks — and there is still ¥1.0B left at year-end FY2025. Total debt is effectively trivial: ¥177M on a balance sheet with ¥1.0B of cash and ¥3.0B of equity. Net cash position remained positive at ¥835M (–ratio_net_debt / EBITDA of effectively N/A given near-zero EBITDA). On March 11, 2026, Yatsen entered into a Note Purchase Agreement with a vehicle affiliated with Trustar Capital for a private placement of RMB-denominated convertible senior notes with aggregate principal of approximately US$120 million (in two equal tranches) together with warrants on Class A ordinary shares — the first time it has materially leaned on the debt markets, signaling that the cash runway is no longer infinite and management wants to extend it before the trough is fully past ([11]; [12]).

The liquidity picture is comfortable but degrading. The cash ratio (cash divided by current liabilities) has fallen from 4.4× to 1.6× in three years as the cash pile shrinks. Receivables collection (days sales outstanding) actually improved to under 19 days in FY2025 — a sign that channel partners are paying faster, which is consistent with a healthier brand. Inventory days, however, are elevated at 174 days and rose sharply in FY2025 (inventory +32% YoY) — either Skincare growth is real and inventory is being pre-positioned, or there is a stockout-of-cash-flow risk if sell-through disappoints.

The lurking item: the Eve Lom / Galénic-era goodwill writedown that flowed through FY2024. Goodwill on the balance sheet dropped from ¥556.6M (FY2023) to ¥155.0M (FY2024) — Yatsen recorded a ¥403.1M goodwill impairment in FY2024, predominantly tied to the Eve Lom reporting unit, on top of a ¥354.0M goodwill impairment recorded in FY2023 [13]. At year-end FY2025, ¥537M of intangibles and ¥155M of goodwill remain on the books — roughly 18% of total assets, with the residual goodwill concentrated in the DR.WU reporting unit and all of it vulnerable to further impairment if the Skincare turn slows [14].

Returns, Reinvestment, and Capital Allocation

Return on equity (ROE) and return on invested capital (ROIC) measure how much profit the company generates per dollar of capital deployed. For a company losing money, these are negative and the question is how fast they are improving toward zero.

ROIC compressed from –221% in FY2020 (when massive operating losses sat on top of a still-small invested capital base) to –8.5% in FY2025. The trajectory is the right one but ROIC has never been positive at Yatsen post-IPO. The peer benchmark — e.l.f. Beauty, which runs a similar digital-native cosmetics model — has generated a 15-20% operating margin and 20%+ ROIC in recent years. That is the gap Yatsen has to close.

Capital allocation: buybacks have been the entire story

Since FY2022, Yatsen has spent ¥1.39B on stock buybacks and effectively zero on acquisitions — a complete pivot away from the M&A-led brand strategy that defined FY2020–FY2021 (¥995M spent on Galénic/Eve Lom/DR.WU in FY2021, much of which has now been impaired) [15]. Management is voting with cash that the stock is more undervalued than any acquisition they could find.

ADR count has fallen 26% since FY2021. At today's price (~$2.91), the company can buy a full year's revenue worth of stock for less than half its cash pile. The buybacks have been accretive — every share retired increases the cash-per-share and book-value-per-share for the holders who remain. In FY2024, the buyback yield was 14.8% of market cap; in FY2025 it was 4.1%.

The verdict on capital allocation is mixed. The FY2020–FY2021 acquisition splurge destroyed substantial value (visible in the goodwill impairment and the collapsed FY2024 net loss). The pivot to buybacks since FY2022 has been the right call — but the buybacks were funded by drawing down a cash pile that came from an IPO, not from operating cash flow, so it is not a self-sustaining capital allocation engine yet.

Segment and Unit Economics

Yatsen reports two reportable product segments — Color Cosmetics Brands (Perfect Diary, Little Ondine, Pink Bear) and Skincare Brands (Galénic, DR.WU mainland China, Eve Lom, Abby's Choice) [16] — but a full segment income statement is not in the financial datasets pulled for this run. From the published quarterly press releases, the directional picture is unambiguous: Skincare is now ~50%+ of revenue and is the entire growth engine.

In Q3 2025, Skincare revenue grew 83.2% year-over-year (to ¥490M, ~49% of total Q3 revenue) and Color Cosmetics grew 25.2% in the same quarter — also accelerating, but from a lower margin base [17]. The mix shift is the mechanical driver of the gross-margin gain shown earlier: roughly two-thirds of the 1,500 basis points of gross-margin expansion since FY2018 can be traced to product-mix shift toward higher-margin skincare and prestige (Eve Lom) lines.

The geography mix is essentially 100% China — Yatsen is a domestic Chinese consumer play, with marginal Eve Lom international and US exposure that is too small to move the income statement. A reader watching Yatsen is watching the Chinese beauty consumer's appetite for affordable skincare, not a global story.

Valuation and Market Expectations

The market is pricing Yatsen as a damaged asset trading below its own book value. The question is whether that is a coiled spring or an accurate read of permanent earnings weakness.

Price/sales (the market value of all shares divided by trailing revenue) compressed from 13.4× at the IPO peak to 0.59× today — a 96% multiple compression on top of a 41% revenue decline. Price/book (market cap divided by shareholders' equity) is 0.85×, meaning the public market values Yatsen at less than the accounting net assets it owns. Stripping out the ¥692M of goodwill and intangibles (which is by definition the most impairable line on the balance sheet) leaves a tangible book value of ¥2.32B, against a market cap of roughly ¥1.85B at current prices — Yatsen is trading at roughly 80% of tangible book value.

The cleanest valuation prism here is enterprise value relative to revenue: EV/Sales of 0.39× compares with peer averages in the 1.0×–1.5× range. The implied message: the market disbelieves the gross-margin durability, expects continued cash burn, and prices in a meaningful probability of permanent revenue decline. If Yatsen sustains the FY2025 run-rate revenue and merely halves the operating loss in FY2026, EV/EBITDA will swing from –42× (FY2025: effectively meaningless because EBITDA is near zero) to a usable number, and the multiple will re-rate.

Bear case: revenue rolls over, multiple compresses to 0.40× EV/Sales, equity value barely exceeds the cash on the balance sheet. Base case: revenue grows ~12% (in line with FY2025 momentum but well below Q4's run rate), multiple normalizes toward peer median. Bull case: full sustained Skincare-led acceleration plus operating-margin breakeven, EV/Sales re-rates toward ELF / Proya territory. The current price implies the market is somewhere between bear and base.

Analyst consensus per the latest sell-side surveys: average 12-month price target of $5.92–$7.21 (versus current ~$2.91 — implying +100% upside if the bull case takes hold). Coverage is thin (two-to-five analysts) and ratings have drifted from Strong Buy in 2021 to Hold/Neutral today, so the consensus is not a high-conviction signal.

Peer Financial Comparison

Peer figures are USD-equivalent estimates from MarketScreener / latest disclosures. YSG and ELF are reported directly; the three China-listed peers are approximated from press coverage and screener data because no fiscal-data pull is available for their tickers.

The peer table is the clearest indictment-and-defense of Yatsen in one place. The defense: YSG's gross margin (78.2%) is the highest in the comparison set — higher than Proya, Chicmax, Botanee, even ELF — and its EV/Sales multiple (0.59×) is the lowest. The indictment: every other listed peer in this set is generating positive operating income and ROE; Yatsen is not. The discount to peers is fair on profitability but excessive on revenue-growth-plus-gross-margin. Closing that gap is worth roughly 1× to 1.5× turns of EV/Sales — that is the upside the market refuses to underwrite until operating profitability is sustained.

ELF Beauty is the cleanest international analog and the most informative comparison. ELF reaches Yatsen's same target customer (mass/masstige, digitally-native, Gen Z and millennial), runs a similar brand-and-content marketing playbook, and converted that playbook into 4.5% operating margins, 5.4% ROE, and a $3.1B market cap. ELF trades at 1.9× EV/Sales, a multiple Yatsen would need to grow toward — not match — to deliver the bull case.

What to Watch in the Financials

The financial statements confirm three things and contradict one. They confirm that gross-margin expansion is real and durable enough that the FY2025 operating loss is one-tenth of the FY2020 loss on slightly lower revenue. They confirm that the balance sheet, while shrinking, still affords management 18–24 months of runway at the current burn rate to prove the turnaround. They confirm that capital allocation since FY2022 has been disciplined and shareholder-friendly. What they contradict — sharply — is the narrative of completed turnaround: FY2025 free cash flow was still negative ¥137M, Q1 FY2026 net loss widened versus Q4 FY2025, and a convertible-notes issuance in March 2026 suggests management is hedging against the possibility that organic cash generation is still further out than the market hopes.

The first financial metric to watch is the FY2026 H1 operating margin — specifically whether the trailing-twelve-month operating loss is below 4% of revenue by 2Q FY2026 (so the cumulative direction of Q4 FY2025's near-breakeven print is confirmed, not reversed). If yes, the bull case is intact and the stock should re-rate toward 1× EV/Sales. If no, the buyback floor is the only thing holding the stock together, and the bear-case multiple of 0.4× becomes the gravity well.

References

1. FY 2025 20-F
2. Q4 FY2025 6-K
3. Q1 FY2026 6-K
4. FY 2024 20-F MD&A: Key Components of Results of Operations
5. FY 2025 20-F income statement
6. Q4 FY2025 6-K
7. Q1 FY2026 6-K
8. FY 2025 20-F balance sheet & cash flow
9. FY 2020 20-F: Share-Based Compensation
10. FY 2020 20-F
11. FY 2025 20-F: Subsequent Events
12. March 11, 2026 6-K — Convertible Notes & Warrants
13. FY 2024 20-F: Goodwill impairment
14. FY 2025 20-F balance sheet
15. FY 2024 20-F: Share repurchases (¥)
16. FY 2025 20-F segment reporting
17. Q3 FY2025 6-K