Skincare Focus And Color Cosmetics Will Drive Future Success

Key Takeaways

• Focus on balancing skincare and cosmetic segments to support growth and sustain market presence through innovative offerings.
  
• Investment in R&D and operational efficiency is likely to enhance profitability and long-term market competitiveness.
  
• Significant net losses and market challenges, coupled with high competition and R&D spending cuts, threaten Yatsen's future profitability and innovation capacity.

Catalysts

Engages in the development and sale of beauty products under the Perfect Diary, Little Ondine, Pink Bear, Abby’s Choice, GalÃnic, DR.WU, Eve Lom, and EANTiM brands in the People’s Republic of China.

• Yatsen is focusing on balancing its revenue mix to support skincare brand growth, which accounted for 41.1% of total net revenues in 2024. This emphasis on high-growth potential segments is expected to positively impact overall revenue growth.
  
• Strategic initiatives to revitalize color cosmetics, including successful launches like the Biolip Essence Lipstick, are aimed at sustaining revenue growth and expanding market presence through innovative product offerings.
  
• The company is investing in R&D, accounting for 3.2% of total net revenues, to drive innovation and develop new products. This commitment to scientific breakthroughs is anticipated to improve long-term revenue stability and market competitiveness.
  
• Yatsen is actively optimizing operational efficiencies, which has resulted in improved net income margins. Continued focus on reducing operating expenses and enhancing cost structures is likely to further improve profitability.
  
• The expansion into offline distribution channels, which typically incur lower traffic expenses, and strategic marketing spending are expected to bolster profitability by enhancing gross and net margins.

Yatsen Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yatsen Holding's revenue will grow by 8.2% annually over the next 3 years.
• Analysts are not forecasting that Yatsen Holding will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Yatsen Holding's profit margin will increase from -20.9% to the average US Personal Products industry of 5.0% in 3 years.
• If Yatsen Holding's profit margin were to converge on the industry average, you could expect earnings to reach CN¥216.9 million (and earnings per share of CN¥2.97) by about April 2028, up from CN¥-708.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, up from -3.4x today. This future PE is lower than the current PE for the US Personal Products industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Yatsen Holding Future Earnings Per Share Growth

Risks

• The Chinese beauty industry underperformed in 2024, with beauty retail sales declining, which may impact future overall revenue and market growth for Yatsen.
  
• The net loss has been significant, with a net loss margin of 33% for the fourth quarter, indicating ongoing profitability challenges despite some improvements, thus affecting net margins.
  
• Impairment of goodwill for Eve Lom suggests operational challenges, as weaker-than-expected performance could lead to further asset write-downs, impacting earnings.
  
• Intense market competition and consumer price sensitivity may pressure gross margins and hinder the ability to increase prices or maintain market share.
  
• A considerable portion of the company's resources is devoted to research and development, yet R&D expenses decreased as a percentage of total net revenues, potentially limiting future innovative product offerings and revenue growth.

Valuation

• The analysts have a consensus price target of $4.655 for Yatsen Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.8, and the most bearish reporting a price target of just $3.43.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥4.3 billion, earnings will come to CN¥216.9 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 7.8%.
• Given the current share price of $3.59, the analyst price target of $4.65 is 22.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.