Premium Demand Will Stall Amid Intensifying Chinese Oversight And Competition

Key Takeaways

• Long-term sales and profitability face pressure from China's macro headwinds, fierce competition, and rising regulatory expenses impacting margins.
  
• Costly R&D, marketing, and weak acquisition integration threaten sustainable growth and operational efficiency.
  
• Product innovation, operational efficiency, and omni-channel expansion support Yatsen's premiumization strategy and position the company for sustained brand growth and profitability.

Catalysts

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

• The rapid revenue growth in Yatsen's skincare segment is unsustainable given the long-term macro environment in China, where slowing discretionary spending from an aging population and weaker economic growth are likely to constrain future sales expansion, especially for premium beauty products.
  
• Heightened regulatory scrutiny and stricter product safety, ESG, and data privacy requirements-already ramping up in China and key global markets-are poised to drive higher compliance costs and operational complexity, which will eat into net margins and dampen earnings growth.
  
• Intensifying market competition from global incumbents such as L'Oréal and Estée Lauder, alongside nimble domestic challengers, will likely compress Yatsen's pricing power for both skincare and color cosmetics, forcing higher marketing spend and pressuring gross margins and profitability.
  
• Reliance on aggressive R&D and influencer-driven launch cycles risks inflating operating expenses and customer acquisition costs past economically viable levels, especially as younger consumers become more skeptical of new beauty brands, undermining long-term customer loyalty and revenue stability.
  
• Weakness and integration issues in prior acquisitions (notably Galénic and Eve Lom) may lead to persistently high SG&A expenses, continued inefficiency in international expansion efforts, and limited scale benefits-ultimately placing further downward pressure on net income and return on invested capital.

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 18.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -14.1% today to 10.8% in 3 years time.
• The bearish analysts expect earnings to reach CN¥666.1 million (and earnings per share of CN¥5.64) by about August 2028, up from CN¥-528.3 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 3.8x on those 2028 earnings, up from -12.2x today. This future PE is lower than the current PE for the US Personal Products industry at 22.2x.
• Analysts expect the number of shares outstanding to decline by 4.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

Yatsen Holding Future Earnings Per Share Growth

Risks

• Yatsen's significant year-over-year revenue growth of 36.8 percent and strong performance in skincare brands-posting 78.7 percent growth driven by new product launches and innovation-suggest sustained demand and the potential for continued top-line expansion.
  
• The company's focus on R&D-driven product innovation and premiumization, with hero products like the Galénic VC serum and advanced biotech offerings in Perfect Diary, supports higher gross margins and could lead to further improvement in net profitability.
  
• Enhanced operating leverage, ongoing cost-control initiatives, and reductions in general and administrative costs have already resulted in a substantial narrowing of net loss margin to 1.8 percent and a non-GAAP net profit margin of 1.1 percent, indicating increasing operational and financial efficiency.
  
• Continued investment in digital channels, supply chain optimization, and broadening both online and offline distribution-like new experience stores in major Chinese cities-enables Yatsen to strengthen brand reach, mitigate geographic concentration, and stabilize revenues over the long term.
  
• Management's confidence and clear pathway to margin expansion, supported by strategic resource allocation towards higher-return initiatives and the observable upward trend in cash flow from operations, suggest the company is positioned for sustainable earnings growth.

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 $12.98, 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¥666.1 million, and it would be trading on a PE ratio of 3.8x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $9.63, the bearish analyst price target of $3.44 is 179.7% 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.