China's Aging Population And Rising Costs Will Constrain Profitability

Key Takeaways

• Shifting demographics, economic headwinds, and intensifying competition threaten revenue stability and long-term growth for Yatsen's core brands.
  
• Increasing regulatory pressures and changing consumer trends drive up compliance, marketing, and R&D costs, squeezing margins and profitability.
  
• Expanding premium skincare brands, cost control, R&D innovation, and share buybacks strengthen Yatsen's profitability, operating efficiency, and long-term growth prospects.

Catalysts

Engages in the development and sale of beauty products in the People’s Republic of China.

• Falling birth rates and an aging population in China are set to shrink the core addressable market for youth-focused cosmetics and skincare, which will constrain Yatsen's long-term revenue growth despite short-term gains in premium skincare.
  
• Heightened global environmental and regulatory scrutiny on ingredients, packaging, and product safety-especially as Yatsen expands internationally-will drive up compliance and supply chain costs, leading to ongoing gross margin and operating margin pressures.
  
• Income polarization and economic uncertainty in key Asian markets threaten to dampen discretionary spending on non-essential items like beauty products, setting the stage for revenue volatility and a risk of declining sales during downturns.
  
• Intensifying competition and persistent difficulty differentiating the Perfect Diary brand will force Yatsen to rely heavily on expensive influencer-driven digital marketing and ongoing promotions, further compressing margins and hampering sustainable earnings growth.
  
• The rapid proliferation of clean beauty trends and evolving regulatory standards create the risk of sudden obsolescence for core product formulations, necessitating continual costly R&D spending and posing a threat to long-term profitability.

Yatsen Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Yatsen Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Yatsen Holding's revenue will grow by 21.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -17.1% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach CN¥627.9 million (and earnings per share of CN¥5.31) by about August 2028, up from CN¥-588.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 3.7x on those 2028 earnings, up from -10.3x today. This future PE is lower than the current PE for the US Personal Products industry at 19.4x.
• 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 8.26%, as per the Simply Wall St company report.

Yatsen Holding Future Earnings Per Share Growth

Risks

• Yatsen's significant year-over-year revenue growth in premium and clinical skincare brands, such as Galénic, DR.WU, and Eve Lom, suggests increasing pricing power and brand diversification, which may lead to stronger long-term revenue and profit margins.
  
• The marked improvement in gross margin to 79.1 percent, alongside a shift to higher-margin product sales and disciplined cost controls, positions the company to expand earnings and potentially support higher net margins over time.
  
• Investments in research and development, demonstrated by the establishment and accreditation of their Shanghai global R&D center, as well as ongoing scientific collaborations, may drive innovation and deliver a steady pipeline of differentiated products, supporting sustainable revenue growth.
  
• The company's success in optimizing operating expenses, particularly by reducing general and administrative costs and enhancing marketing efficiency, has already resulted in a move from significant losses to non-GAAP profitability, which could signal sustainable improvements in operating income.
  
• The launch of a substantial share repurchase program up to 30 million dollars reflects management's confidence in the company's future prospects, and such buybacks could provide support to the share price by improving earnings per share.

Valuation

• The assumed bearish price target for Yatsen Holding is $3.44, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Yatsen Holding's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.99, and the most bearish reporting a price target of just $3.44.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥6.2 billion, earnings will come to CN¥627.9 million, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $9.18, the bearish analyst price target of $3.44 is 166.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.