Yatsen: Investing Through the Losses — Skincare Pivot and a Fresh Capital Raise
Q1 2026 revenue grew 22.5% but net loss widened to RMB 61.9M as the company doubles down on R&D, AI, and brand-building to compete with foreign premium brands.
YSG · Earnings Call · 2026-05-26
A Quarter of Growth and Loss
Yatsen's first-quarter 2026 results show a company firmly on a growth path, but at an increasing cost. Total net revenues rose 22.5% year-over-year to RMB 1.02 billion (per CFO's report: “Total net revenues for the first quarter of 2026 increased by 22.5% to $1.02 billion from $833.5 million for the prior year period” — Donghao Yang, CFO · 2026-05-26). Gross margin expanded to a "historical milestone" of 80.2%, driven by a 58.5% surge in skincare brand revenues. However, the operating loss deepened to RMB 99 million from RMB 34.1 million, and net loss came in at RMB 61.9 million versus a mere RMB 5.6 million a year ago. The company's net loss is now a central narrative, as the market pays closer attention to the sustainability of this investment cycle. The growth is powered by a deliberate shift: skincare is the engine, while color cosmetics are fading. The CFO noted: "The increase was primarily due to a 58.5% year-over-year increase in net revenues from skin care brands, partially offset by a 5% year-over-year decrease in net revenues from Cove cosmetics brands." This is a continuation of the strategy outlined in prior quarters, but the intensity has amplified. The company is pouring resources into R&D (expenses rose from 2.7% to 3.9% of revenue) and selling & marketing (72.2% of revenue, up from 66.4%). The channel mix is being optimized towards high-margin professional and offline channels, as exemplified by the Douyin brand "oti" which the CEO called "a very important case for us" (inline quote: “The brand has delivered strong growth while maintaining a healthier profitability profile.” — Jinfeng Huang, CEO · 2026-05-26).Raising Capital to Fund the Pivot
Perhaps the most consequential event of the quarter was the financing transaction. On May 21, 2026, the company completed the first tranche of a private placement of convertible notes and warrants. The CEO announced: “Following our announcement on March 11, we are pleased to note that we successfully completed the first charge of the private placement of convertible notes and warrants on May 21, 2026.” — Jinfeng Huang, CEO · 2026-05-26 The deal attracted existing investors like the CEO and Caspian Capital, and welcomed "House" as a new key participant. This capital infusion is critical: the company's cash balance fell from RMB 1.05 billion to RMB 934.2 million in the quarter, and operating cash flow was negative at RMB 90 million. Brand equity building is an expensive endeavor, and the market will watch how efficiently this capital is deployed. The company's belief in its strategy is clear. Despite the wider losses, management remains convinced that R&D-led innovation will win against foreign premium brands. On the competition front, the CEO acknowledged: "Competition is very intense. But we believe we have a differentiated position." The differentiation is anchored in a combination of global heritage (Galenic, Eve Lom) and local consumer insights. A notable addition this quarter is the explicit use of AI: "We are also using AI and data tools to improve consumer insights, content production, CIM and make." This represents a deepening of the application of AI that was first flagged in the previous quarter.Guidance and the Road Ahead
For Q2 2026, the company guides for revenue of RMB 1.2–1.3 billion, representing 10–20% YoY growth — a deceleration from Q1's 22.5%. This suggests the skincare-led momentum is being tempered, possibly by seasonality or increased competition. The company is also streamlining operational expenses, as the CFO mentioned on a prior call: "We are continuing to optimise our channel and product mix, and at the same time, streamline our operating expenses" (from the 2025-11-17 call). That optimization has not yet offset the aggressive spending. Investors have seen this story before. In the 2026-03-02 call, the CFO justified the approach: "we're going to continue to grow our Skincare business much faster than our Color Cosmetics business. And with Skincare business, the gross margin, net margin are typically much higher than Color Cosmetics brands." That logic holds — gross margins are at record highs. But the question remains whether the scale will eventually allow operating leverage to kick in. The company's market cap of just over $200 million suggests the market is pricing in significant uncertainty.The skin care segment is the clear priority, but the color cosmetics brands are still a drag. The company's total revenue mix is shifting toward higher-margin skincare, which should eventually improve the bottom line. However, the near-term financials are worsening, and the capital raise may be a bridge to a more profitable future — or a signal that internal cash flow is insufficient. For a beauty company in a highly competitive Chinese market, Yatsen's bet on R&D and AI is a differentiated path. The use of R&D investment to create clinically-proven products is a credible strategy against foreign brands that have historically dominated the premium segment. The partnership with dermatologists and the release of white papers are tangible steps. Yet, the company's ability to convert this into sustained profitability remains unproven. The second half of 2026 will be telling: if the skincare brands continue to grow at a 50%+ clip and marketing efficiency improves, the losses could narrow. But if growth decelerates faster than expected, the new capital may not be sufficient.Competition is very intense. But we believe we have a differentiated position.