Under the pressure of the industry, what did Yatsen Holding Ltd. ADR Class A (YSG.US) do right by handing in a counter-trend breakthrough answer sheet?

2024, the Chinese cosmetics market is undergoing a new round of reshuffling. When "facing challenges", "market headwinds", and "growth below expectations" become high-frequency words in the financial reports of many leading beauty companies, global beauty and luxury conglomerates such as L'Oreal, Estee Lauder Companies Inc. Class A, LVMH also faced setbacks in their performance in China, with the industry's outlook being weak. However, there are still companies that achieved rare counter-cyclical growth during this year. As a representative of domestic beauty brands, Yatsen Holding Ltd. ADR Class A (YSG.US) delivered a significant transformation response despite the overall industry pressure. "Cost reduction and efficiency improvement + deep research and development" build a moat, dual-drive results show effectiveness According to data from the National Bureau of Statistics, the retail sales of cosmetics in December 2024 were 34.5 billion yuan, a year-on-year increase of 0.8%; the annual retail sales of cosmetics in 2024 were 435.7 billion yuan, a year-on-year decrease of 1.1%. International beauty brands in the Chinese market generally faced growth bottlenecks, with L'Oreal's sales in North Asia in 2024 decreasing by 3.2% year-on-year and experiencing negative growth in the Chinese market for the first time; Estee Lauder Companies Inc. Class A's net sales in the second quarter of 2025 decreased by 6%, and net sales in the Asia-Pacific region decreased by 11%. In this background, Yatsen Holding Ltd. ADR Class A handed in a significant performance report to the market. It is understood that in the fourth quarter of 2024, Yatsen Holding Ltd. ADR Class A achieved a revenue of 14.5 billion yuan, a year-on-year increase of 7.1%, outperforming the industry average growth of 4.9%. The company achieved a revenue of 33.9 billion yuan in the full year of 2024. In the fourth quarter of 2024, the Non-GAAP net income of Yatsen Holding Ltd. ADR Class A turned positive to 1.07 billion, with a Non-GAAP profit margin of 9.3%, reaching a historical high since listing and significantly enhancing profitability. Behind the counter-cyclical breakthrough is the dual-drive results of "cost reduction and efficiency improvement + deep research and development". In the fourth quarter of 2024, the total operating expenses of Yatsen Holding Ltd. ADR Class A decreased by 3.5% year-on-year. Among them, the company's market and sales expenses ratio decreased significantly by 6.8% year-on-year; the administrative expenses to revenue ratio decreased from 14.8% to 8.7%. Operating expenses continue to be optimized, and market expenses also decreased year-on-year due to more strategic spending. Since Yatsen Holding Ltd. ADR Class A went public 5 years ago, the company has continued to improve and deepen its research and development strategic layout along the "Yixian Technology Road". With the strong support of R&D expenses, research and development results continue to be implemented, and brands under the group have all achieved brand power enhancement empowered by scientific research. In terms of research and development, the company invested 26.3 million yuan in research and development in the fourth quarter of 2024, an increase of 3.95% from the previous quarter. The full-year research and development expenses in 2024 reached 109 million yuan, accounting for 3.23% of revenue, at the forefront of the industry. Regarding the company's performance, Yatsen Holding Ltd. ADR Class A founder, chairman, and CEO Huang Jinfeng stated, "Despite the ongoing challenges faced by the beauty market, the company still achieved steady development in the fourth quarter of 2024. This reflects the company's strategic initiatives in product research and development, brand building, and cost optimization have achieved phased success. In the future, the company will continue to focus on the strategic transformation plan, deepen the strategic transformation, and fully promote sustainable growth in performance." Against the backdrop of overall industry pressure, as a representative of domestic beauty brands, Yatsen Holding Ltd. ADR Class A achieved counter-cyclical growth in the year of change, and turned losses into profits at the Non-GAAP level, demonstrating strong resilience and growth potential. According to the company's performance guidance for the first quarter of 2025, the company expects a year-on-year total revenue growth of about 2% to 12%. All of this indicates that the effects of the company's strategic transformation are gradually being released, blood-making ability has been greatly improved, and the significant effects of high-quality development are evident. The share of skincare business has broken through 41%, the potential of the second growth curve is stable In 2022, Yatsen Holding Ltd. ADR Class A first disclosed its new five-year strategic transformation plan to the public. By optimizing its business structure, controlling operating expenses, and taking various measures, the company has steadily promoted "weight loss and muscle gain", and Yatsen Holding Ltd. ADR Class A embarked on its second entrepreneurship. Now, as the company's new transformation strategy continues to deepen, the growth logic driven by the twin engines of the company is gradually emerging. At the business level, Yatsen Holding Ltd. ADR Class A's skincare business and makeup business have gradually built a dynamic business structure. It is understood that the company's skincare business has grown at a rate of over 30% for 11 consecutive quarters, forming a stable second growth curve that contributes steadily to the company. In 2024, the proportion of Yatsen Holding Ltd. ADR Class A's skincare business reached 41.1%, setting a new high in annual revenue contribution rate. Among them, the company's three major skincare brands have steadily advanced, and star products have achieved breakthroughs in channels. In the fourth quarter of 2024, the company's Colleen brand achieved comprehensive year-on-year growth in Tmall self-operated channels, live broadcasting rooms, and second-tier broadcasting in Tmall, and ranked first in high-end skincare sales on Douyin during Double 11; EVE LOM achieved steady growth on Tmall, with first-time Double 11 sales exceeding one billion; DR.WU's almond acid essence also sold over 600,000 pieces, ranking first in sales of acid essence in United Microelectronics Corp. Sponsored ADR outlets.In terms of business, Perfect Diary, a brand under the company, is leading the industry in the development of "makeup and skincare integration". They have released the first "makeup and skincare integration" research report and innovated a series of products under this concept, such as the "Biomimetic Film" essence lipstick, "Biomimetic Film" essence lip gloss, "Three-C Essence" foundation liquid, four-color "Essential" eyeshadow, and "Peptide" essence colorless cream. Among them, the second generation of Perfect Diary's Biomimetic Film essence lipstick continues to be a hot seller.With the innovative development of the company's "makeup and skincare integrated" concept, a breakthrough in technology has been achieved in the field of makeup, with the exclusive "biomimetic film" lipstick with color-locking and lip care technology alone achieving cumulative sales exceeding 4.71 million units. During the Double Eleven promotion, it continuously topped 8 popular rankings, reaching TOP 1. In the fourth quarter of 2024, the company's makeup business also achieved a year-on-year growth of 16.4%. In conclusion, based on the current cosmetics market, research and development will continue to increase in 2025. In this intense competitive battle, Yatsen Holding Ltd. ADR Class A has already gained the upper hand. Looking at the industry development trend, in 2023, China's cosmetics market size reached 579.8 billion yuan, and according to Frost & Sullivan, it is expected to reach 876.3 billion yuan by 2028, with a CAGR of 8.6% from 2023 to 2028. Skincare accounts for about 80% of the market, and skincare market growth will outpace makeup, with an estimated CAGR of 8.7% for skincare and 8.4% for makeup from 2023 to 2028. Furthermore, Frost & Sullivan believes that China's high-end makeup process is accelerating, and the growth rate of high-end beauty market will also be higher than the overall market. In 2023, the market size of high-end beauty/high-end makeup in China was 194.2 billion yuan/47.1 billion yuan respectively, and it is expected to grow at a compound annual growth rate of 9.9%/10.8% in the next 5 years. In the context of consumers becoming increasingly rational in their decision-making and having diverse needs, the competition in the beauty and skincare market has evolved from a simple product and channel competition to a comprehensive battle of "technology + content + operation." Brands not only need to build innovation barriers in technology research and development but also need to accurately understand the content preferences of their target audience and achieve targeted outreach through refined operations, in order to stand out in the fierce market competition. Now, Yatsen Holding Ltd. ADR Class A has further perfected its complete ecological chain from cutting-edge technology research to advanced manufacturing, providing a reference for high-quality development of domestic beauty products. With the deepening of the strategic transformation, Yatsen Holding Ltd. ADR Class A has enhanced its capabilities in product research and development, brand building, and cost optimization. The company's revenue structure continues to improve, operational efficiency and profitability further increase, and facing the expected market size of over 800 billion yuan for cosmetics and skincare products by 2028, this strategic determination that has been market-validated is expected to help it continue to achieve excess returns in the industry differentiation.