Executive Summary / Key Takeaways

• Yatsen Holding Limited ($YSG) is undergoing a strategic transformation, pivoting towards an R&D-driven model and prioritizing high-margin skincare brands, which has propelled the company back to non-GAAP profitability for three consecutive quarters by Q2 2025.
• Skincare brands, particularly Galénic, DR.WU, and Eve Lom, are the primary growth engines, demonstrating robust year-over-year revenue increases, while the Perfect Diary color cosmetics brand has returned to growth through product innovation and a "makeup skinification" philosophy.
• The company's significant investment in R&D, including advanced biotech and proprietary technologies, is a core competitive differentiator, driving new product innovation and enhancing brand equity across its portfolio.
• Despite a challenging Chinese beauty market characterized by modest growth and intense competition from international brands, Yatsen's strategic focus on product mix optimization, marketing efficiency, and operational streamlining is expected to drive gradual profitability expansion alongside continued revenue growth.
• Yatsen anticipates Q3 2025 net revenues to increase by 15% to 30% year-over-year, reflecting confidence in its strategic initiatives and a commitment to balancing growth with profitability.

The Reshaping of a Beauty Innovator

Yatsen Holding Limited, founded in 2016 in Guangzhou, China, has rapidly evolved from a digitally native color cosmetics player to a diversified beauty group. Operating brands such as Perfect Diary, Galénic, DR.WU, and Eve Lom, Yatsen has carved out a significant presence in the dynamic Chinese beauty market. The company's journey has been marked by a strategic transformation, particularly since 2023, focusing on an R&D-driven approach to navigate a competitive landscape and capture higher-margin opportunities within the beauty sector. This strategic pivot has been crucial in shaping its current market position and future trajectory.

The Chinese beauty industry, while vast, has experienced periods of modest growth and even declines in recent years. In Q2 2025, beauty sales increased by a mere 2.6% year-over-year, lagging the broader retail market, with a notable decline in June. This challenging environment has intensified price competition and driven consumers towards more rational purchasing decisions. Against this backdrop, Yatsen's strategic shift is designed to build resilience and sustainable growth.

In this competitive arena, Yatsen faces formidable global players like L'Oréal (OR), Estée Lauder (EL), and Shiseido (SSDEF). L'Oréal, with its extensive brand portfolio and global reach, boasts consistent revenue growth and strong profitability, benefiting from established brand loyalty and a vast distribution network. Estée Lauder, a leader in luxury cosmetics, commands superior brand prestige and high profitability margins from its premium pricing strategy. Shiseido, strong in Asian markets, differentiates through technological advancements in skincare. Yatsen's competitive edge lies in its digital agility, localized branding, and rapid response to Chinese consumer trends, particularly through its strong e-commerce presence on platforms like Tmall and Douyin. While Yatsen excels in innovation speed for trend-specific products and market penetration in China, it generally trails these global giants in overall financial scale, global reach, and established brand prestige in the premium luxury segments.

Technological Edge: The Foundation of Yatsen's Innovation

Central to Yatsen's strategic transformation is its unwavering commitment to research and development, positioning itself as a "world-class pioneer in beauty innovation." This R&D-driven approach is not merely a buzzword but a foundational strength that underpins its product development and competitive differentiation. The company has actively expanded its international innovation network, attracted top global R&D talent, and fostered collaborations across industry, academia, and research institutions. Its global R&D center in Shanghai, inaugurated in 2024, received accreditation from the China National Accreditation Service for conformity assessment, placing it among the top tier of global testing institutions. This complements its Guangzhou R&D center, recognized in 2022, showcasing a robust scientific infrastructure.

Yatsen's technological differentiators are evident across its brand portfolio. For Galénic, the upgraded Brightening Micro Mask incorporates "micro-perfusion" and "active anchor technology," which contributed to its #1 ranking among premium single-use masks on Tmall and JD during the June 18 period . These technologies are designed to enhance product efficacy and delivery, providing tangible benefits in skin brightening and renewal. Similarly, Perfect Diary's strategic pivot towards "makeup skinification" leverages third-generation biotech technology. The new Biophased Essence Foundation, for instance, provides a flawless finish while actively supporting the skin barrier, a significant advancement in cosmetic formulation . The brand's translucent blurring setting powder, powered by "SmartLock technology," aims to control oil, combat oxidation, and reduce dullness, directly addressing key consumer concerns .

These technological advancements translate into a clear "so what" for investors. By developing efficacious and innovative products, Yatsen strengthens its competitive moat, allowing it to command better pricing and improve gross margins, as evidenced by the increase in sales of higher gross margin products. The ability to rapidly introduce new products, such as Galénic's #2 VA serum expanding its anti-aging offerings or DR.WU's Purifying Renewal Essence Toner for oily/acne-prone skin, directly contributes to market share gains and sustained revenue growth. This R&D investment, representing 3.2% of total net revenues for full-year 2024, is a strategic allocation of resources aimed at long-term sustainable growth and enhanced market positioning against both local and international rivals.

Financial Resurgence and Strategic Execution

Yatsen's strategic transformation has yielded tangible financial results, marking a significant turnaround in its performance. In the second quarter of 2025, total net revenues surged by 36.8% year-over-year to RMB 1.09 billion, significantly exceeding previous guidance . This robust growth was primarily fueled by a remarkable 78.7% year-over-year increase in net revenues from skincare brands, with the combined revenue from Galénic, DR.WU, and Eve Lom growing by an impressive 88.1% . Even color cosmetics, led by Perfect Diary, returned to growth with an 8.8% year-over-year increase in net revenues .

Profitability has also seen a dramatic improvement. Yatsen achieved non-GAAP net income for the third consecutive quarter in Q2 2025, with a non-GAAP net profit margin of 1.1%, a substantial improvement from a 9.4% non-GAAP net loss margin in the prior year period .

The gross margin expanded to 78.3% in Q2 2025 from 76.7% in the prior year, driven by the increased sales of higher-margin products, particularly within the skincare segment . This trend of margin expansion is a direct reflection of the company's strategic pivot towards premiumization and R&D-backed product innovation.

Operational efficiencies have played a crucial role in this financial resurgence. Total operating expenses as a percentage of total net revenues decreased to 83.4% in Q2 2025 from 93.7% in the prior year . This was driven by improvements across the board: fulfillment expenses decreased to 5.8% from 6.4% due to better logistics efficiency ; selling and marketing expenses narrowed to 66.5% from 68.6% due to the deleveraging effect of higher revenues ; and general and administrative expenses significantly dropped to 7.7% from 15% due to headcount reductions and deleveraging . Even R&D expenses, while increasing in absolute terms, decreased as a percentage of revenues to 3.3% from 3.7% due to the deleveraging effect .

Looking at liquidity, Yatsen maintains a solid cash position. As of June 30, 2025, the company held RMB 1.35 billion in cash, restricted cash, and short-term investments . Notably, net cash generated from operating activities turned positive in Q2 2025, reaching RMB 77.7 million, a significant reversal from the RMB 148.2 million used in the prior year period . This improved cash flow generation underscores the effectiveness of its operational streamlining and profitability initiatives. The company's confidence in its future is further demonstrated by the approval of a new share repurchase program in April 2025, authorizing up to $30 million in repurchases over 24 months .

Outlook and Competitive Trajectory

Yatsen's management remains optimistic about its trajectory, providing guidance for Q3 2025 total net revenues to be between RMB 778.6 million and RMB 880.1 million, representing a year-over-year increase of approximately 15% to 30% . This outlook is predicated on the continued execution of its R&D-driven strategy and operational efficiencies. Management explicitly states that it does not believe it has to sacrifice growth for profitability, especially as higher-margin skincare brands continue their strong growth momentum .

The company's strategy for sustained profitability involves several key initiatives. Yatsen plans to further optimize its product mix by driving premiumization and focusing on hero products with stronger margins. Marketing efficiency will be enhanced through data-driven CRM and a better ROI discipline, shifting spending towards higher-return channels. Furthermore, improvements in supply chain and operational efficiency are expected to reduce costs and leverage scale. As top-line growth continues, Yatsen anticipates gaining operating leverage across fixed expenses, though profitability improvement is expected to be gradual due to ongoing investments in brand awareness and equity, particularly for new product launches .

Despite the positive momentum, Yatsen acknowledges persistent market headwinds, including intensified price competition and more rational consumer purchasing decisions . The competitive landscape, particularly from international premium brands, is expected to become more intense as Yatsen's high-end skincare brands grow faster . However, Yatsen views its "best-in-class R&D team and R&D infrastructure" as its primary defense and growth driver against these rivals . The company's ability to adapt quickly to local trends and leverage its digital channels remains a key advantage.

Conclusion

Yatsen Holding Limited is demonstrating a compelling investment narrative rooted in a successful strategic transformation. By prioritizing an R&D-driven approach and focusing on high-margin skincare brands, the company has engineered a return to non-GAAP profitability and robust revenue growth, even amidst a challenging market. Its technological advancements, particularly in biotech-infused makeup and efficacious skincare formulations, are not just innovations but critical competitive differentiators that enhance product appeal and expand margins.

While the Chinese beauty market remains intensely competitive, Yatsen's disciplined operational improvements, coupled with its commitment to innovation and strategic brand building, position it for continued expansion. The company's outlook for sustained growth and gradual profitability expansion, supported by a solid cash position and a clear strategic roadmap, suggests that Yatsen is actively shaping its destiny in the dynamic beauty industry. Investors should closely monitor the execution of its R&D pipeline and its ability to further penetrate the premium skincare market, as these will be pivotal in solidifying its long-term competitive standing and unlocking further value.