Yatsen’s Skincare Surge and Strategic Buybacks Signal Undervalued Recovery

Amid a sluggish beauty market, Yatsen Holding Limited (NYSE: YSG) has executed a dramatic turnaround, leveraging its premium skincare brands to drive profitability and shareholder value. With skincare revenue surging 47.7% year-over-year in Q1 2025—far outpacing total revenue growth of 7.8%—the company has positioned itself as a leader in China’s premium skincare sector. Combined with a narrowed net loss, margin expansion to 79.1%, and a new $30 million share repurchase program, Yatsen’s strategy signals an undervalued opportunity for investors.

The Skincare Lever: Growth Amid a Slump

Yatsen’s shift from low-margin color cosmetics to high-margin skincare has been nothing short of transformative. In Q1, skincare contributed 43.5% of total revenue, up from 31.7% in 2024, with brands like Galénic and DR.WU driving a 58% revenue jump. This pivot is critical in a market where beauty demand remains “soft,” but premium skincare—backed by clinical efficacy and social media buzz—continues to thrive.

The skincare segment’s dominance is a strategic masterstroke. While color cosmetics revenue fell 9.9% YoY, skincare’s margin profile (with gross margins near 80%) has insulated Yatsen from broader market volatility. This segment’s growth isn’t just about volume; it’s about selling higher-priced, repeat-purchase items that command loyalty. As Yatsen CEO Wenyan Yang stated on the Q1 earnings call, “Our clinical-backed products are resonating with a demographic willing to pay a premium for efficacy.”

Margin Expansion: Proof of Operational Discipline

Yatsen’s financial metrics tell a story of disciplined execution. Gross margin hit 79.1% in Q1—up from 77.7% in 2024—thanks to the skincare mix and cost controls. Operating expenses fell 8.6% to RMB693.2 million, with selling and marketing costs dropping to 66.4% of revenue (from 69.7%). This efficiency has translated to a 95.5% narrowing of the net loss to RMB5.6 million, while non-GAAP net income turned positive for the first time at RMB7.1 million.

The cash position reinforces this turnaround. Yatsen holds RMB1.28 billion ($176 million) in cash and short-term investments, up from cash burn in prior years. With free cash flow turning positive (RMB23.8 million generated in Q1 vs. RMB121.8 million used in 2024), the company is now capital-light and primed to capitalize on opportunities.

Capital Allocation: Buybacks Signal Confidence

Yatsen’s announcement of a $30 million share repurchase program—on top of nearly completing a prior $200 million buyback—sends a clear message: management believes the stock is undervalued. At a trailing P/E of -4.93 (due to prior losses), the market has yet to price in Yatsen’s recovery.

The stock’s 4.76% jump on May 16—the day of Q1 results—hints at investor recognition of this value. With a market cap of $1.2 billion and $176 million in cash, Yatsen’s equity is effectively trading at a fraction of its asset value. The buybacks further reduce shares outstanding, amplifying earnings per share and compounding returns for long-term holders.

Why Yatsen Is a Buy Now

Yatsen’s story is one of resilience. It has navigated a challenging beauty market by:
1. Repositioning for premium growth: Skincare’s scalability and margin profile ensure profitability even in weak macro conditions.
2. De-risking operations: Cost cuts and cash flow generation reduce vulnerability to market downturns.
3. Activating shareholder returns: Buybacks and a clean balance sheet (zero retained losses) align interests with investors.

The Q2 revenue guidance of 2–12% growth suggests management’s confidence isn’t misplaced. With skincare’s momentum and operational discipline intact, Yatsen is well-positioned to capture China’s $90 billion skincare market, which is growing faster than the beauty sector overall.

Conclusion: A Rare Value Play in Beauty

Yatsen’s strategic shift to premium skincare, paired with margin gains and capital returns, makes it a compelling contrarian bet. The stock trades at a fraction of its asset value, and the skincare tailwinds are structural, not cyclical. For investors seeking exposure to China’s premium beauty boom—and a company with the discipline to execute—Yatsen is a buy at current levels.

The path forward is clear: Yatsen’s skincare dominance, margin resilience, and shareholder-friendly policies position it to rebound. The question isn’t whether the market will recognize this—when it does, the upside could be swift. Act now.