Yatsen Holding: A Beauty Industry Turnaround Story with Margin Magic and Undiscovered Upside

In a beauty market grappling with moderation, Yatsen Holding (YSG) has quietly engineered a transformation. By pivoting toward premium skincare, slashing costs, and deploying capital strategically, the company has positioned itself as a rare gem in a sector still navigating economic headwinds. Let’s dissect why Yatsen’s structural improvements make it a high-conviction buy at current valuations.

1. The Skincare Surge: Premium Pricing Meets Margin Power

Yatsen’s 47.7% year-over-year skincare revenue growth in Q1 2025 is not just a numbers game—it’s a testament to a deliberate brand升级 strategy. Brands like Galenic (with its cult-favorite Vitamin C serum) and Dr. Wu (the dermatologist-backed acne hero) now command 79.1% gross margins, far above the 70-75% industry average. This margin expansion isn’t luck—it’s the result of:
- Product differentiation: Galenic’s Secret Deacellence Active Cream ranks Top 6 on Tmall for anti-aging creams, while Dr. Wu’s Acne Research Fund has attracted over 350 clinical proposals, reinforcing its scientific credibility.
- Channel optimization: Douyin (TikTok’s e-commerce platform) now outperforms Tmall for skincare sales, enabling Yatsen to capitalize on livestreaming’s viral potential at lower marketing costs.

Why this matters: Higher-margin skincare now accounts for 43.5% of total revenue, up from 31.7% in 2024. This shift is a self-reinforcing cycle: premium products attract higher prices and customer loyalty, while reducing reliance on lower-margin color cosmetics, which declined 9.9% YoY.

2. Cost Discipline: From Loss Maker to Profit Machine

While skincare growth grabs headlines, Yatsen’s operational efficiency is the silent hero. The company slashed general and administrative (G&A) expenses by 10.3% of net revenue, dropping from 18.1% in 2024 to just 7.8% in Q1 2025. This wasn’t achieved through layoffs alone—it’s a mix of:
- Strategic headcount reductions, particularly in non-core roles.
- Lower share-based compensation via graded-vesting equity awards.
- Fulfillment cost optimization, reducing logistics expenses to 6.2% of revenue.

The result? A non-GAAP net income of RMB7.1 million in Q1 2025, turning positive for the first time in years. Even GAAP net loss narrowed to 0.7% of revenue, down from 16.1% in 2024.

Why this matters: Cost discipline isn’t just about cutting costs—it’s about freeing capital to fuel growth. With RMB1.28 billion ($176 million) in cash, Yatsen has the liquidity to invest in R&D (e.g., its newly CNAS-accredited Shanghai lab) without diluting shareholders.

3. Share Repurchase: Management’s Confidence in Action

The $30 million share repurchase program announced in May 2025 is a bold vote of confidence. With shares trading at just 2.2x forward revenue (vs. peers at 3-5x), this move signals:
- Undervaluation: The market has yet to price in Yatsen’s margin improvements and skincare dominance.
- Capital efficiency: Repurchases will directly boost EPS and shareholder returns, especially as the company scales.

Why this matters: Buybacks are a catalyst for value accretion. With net debt at zero, Yatsen can execute without financial strain, unlike peers burdened by debt or cash shortages.

4. June 18 Momentum and Q2 Guidance: The Upside Is Coming

The June 18 shopping festival, China’s second-largest e-commerce event, is a critical test. While management calls it “too early” for final results, sales so far are “in line with expectations.” Key tailwinds include:
- Premium launches: Galenic’s new Micro Mask (with whitening certification) and Dr. Wu’s UVex whitening lotion are driving traffic.
- Douyin dominance: Yatsen’s skincare brands are outperforming on Douyin, where livestreaming drives impulse purchases.

Q2 guidance of 2-12% revenue growth (midpoint: 7% YoY) may seem modest, but it’s a floor, not a ceiling. If June 18’s early traction converts into full-period sales, the upper end of 12% is achievable, unlocking upside for Q2 and beyond.

Conclusion: Why Yatsen Is a Buy Now

Yatsen is a rare blend of margin expansion, cash generation, and undervalued growth. Its skincare-led strategy has turned a cyclical business into a structural growth story, while cost discipline ensures profits follow. With shares trading at a discount to peers and a buyback fueling demand, the catalysts are clear:
- Margin leverage: Every incremental skincare sale adds disproportionately to profits.
- June 18 upside: A strong festival could push Q2 results to the top of guidance.
- Share repurchase: Management’s stake in success is aligned with investors’.

The risks? A weak beauty market or color cosmetics recovery. But with skincare’s premium pricing and Yatsen’s execution track record, these are manageable.

For income-focused investors, Yatsen’s path to positive GAAP net income is clear. For growth investors, its skincare brands are scaling in a $60 billion global premium skincare market. The math is simple: YSG is a buy at current levels.

This analysis is based on publicly available financial data and management commentary as of May 16, 2025.