Business context and reporting period
Yatsen Holding Limited’s Form 20-F is an annual report for the fiscal year ended December 31, 2022, not a standalone 2022 fourth-quarter filing. The company sells color cosmetics and skincare in China and internationally through brands including Perfect Diary, DR.WU, Galénic and Eve Lom. It reports under U.S. GAAP. Amounts below are RMB unless otherwise indicated.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | RMB3.706bn (US$537.3m), down 36.5% | RMB5.840bn |
| Gross profit / margin | RMB2.519bn / 68.0% | RMB3.899bn / 66.8% |
| Operating loss | RMB928.9m | RMB1.624bn |
| Net loss | RMB821.3m (US$119.1m); net loss margin 22.2% | RMB1.547bn; net loss margin 26.5% |
| Operating cash flow | RMB136.2m (US$19.7m) | Use of RMB1.020bn |
| Investing / financing cash flow | Use of RMB1.155bn / RMB654.5m | Use of RMB1.484bn / RMB1.7m |
| Cash and restricted cash at year-end | RMB1.554bn (US$225.4m) | RMB3.138bn |
| Short-term investments | RMB1.073bn | None reported |
At year-end, current assets were RMB3.508bn and current liabilities RMB588.4m. Lease liabilities totaled RMB132.6m, including RMB79.6m due within one year. The cash flow statement reports no short-term borrowing proceeds in 2022 and no conventional debt balance is identified in the supplied filing text. Management said existing cash and cash equivalents were expected to cover anticipated working capital needs and capital expenditures for at least 12 months.
Material changes versus prior comparable period
- Revenue fell 36.5%, chiefly because color cosmetics revenue declined 50.4% to RMB2.416bn amid weak category demand, competition, fewer stores and more restrained discounting.
- Skincare revenue rose 45.2% to RMB1.242bn and increased to 33.5% of sales from 14.6%. Color cosmetics’ share fell to 65.2% from 83.4%.
- Gross margin improved 1.2 percentage points to 68.0%, attributed to a richer skincare mix, stricter pricing and discount policies, and cost optimization.
- Operating expenses declined to RMB3.448bn from RMB5.523bn. Selling and marketing expense fell to RMB2.330bn; general and administrative expense to RMB720.4m. Marketing expense remained high at 62.9% of revenue.
- Net loss narrowed by RMB725.7m, while operating cash flow turned positive. Cash and restricted cash declined by RMB1.584bn during the year, partly reflecting investment purchases and share repurchases.
Outlook, commentary, risks and unusual items
Management is executing a five-year strategic transformation plan focused on growing skincare, refining color-cosmetics product and channel mix, investing in R&D, stricter pricing and discounting, closing underperforming stores, and improving efficiency. It provided no quantified revenue, earnings or margin guidance in the filing. Management expects to moderate capital expenditure. The Cosmax manufacturing and R&D hub was under construction, with production then expected to begin in 2023.
- Cash uses and commitments: FY2022 investing outflow included RMB2.422bn of short-term investment purchases and RMB1.460bn of maturities/sales; financing outflow was principally RMB654.7m of ordinary-share repurchases. Contractual commitments at year-end included RMB450m capital commitment, RMB88.7m product and service purchases, and RMB141.9m operating lease obligations.
- Unusual charges and estimates: The company recorded RMB340.9m of share-based compensation and RMB72.6m of property and equipment impairment, mainly related to stores slated for closure. Inventory was RMB423.3m net of a RMB104.9m impairment allowance. Goodwill was RMB857.1m, including RMB694m for Eve Lom; the annual impairment test identified no goodwill impairment. Goodwill valuation and inventory recoverability were critical audit matters.
- Legal contingency: A putative U.S. securities class action filed in September 2022 alleges misleading IPO-related disclosures. The company said the case was preliminary and that potential loss could not be reasonably estimated; no liability was recorded.
- Principal risks: Continued weakness in discretionary beauty demand, competition and brand/product execution; dependence on third-party e-commerce platforms, manufacturers and logistics providers; inventory obsolescence; and the effects of COVID-19 disruptions and China’s economic conditions.
- China structure and regulation: The Cayman Islands parent relies partly on contractual arrangements with a PRC VIE, which contributed 8.7% of 2022 revenue and holds certain online platforms and licenses. Enforceability, regulatory approval and data-security requirements remain risks. The CSRC’s overseas-listing filing rules became effective March 31, 2023; the filing describes uncertainty over their application to future offerings.
- Other investor considerations: The filing says Yatsen believed it was a PFIC for U.S. tax purposes in 2022 and likely would be one in 2023. PCAOB access to the auditor was restored in December 2022, though future inspection access could change. The company reported that a material weakness in financial reporting controls identified for 2021 was remediated and that management and the auditor concluded controls were effective at December 31, 2022.
Important facts for investors to verify
- Whether skincare growth can offset further color-cosmetics declines and improve total revenue without sacrificing margin.
- Whether positive operating cash flow is sustainable, and how much liquidity is available after restricted cash, investments, commitments and repurchases.
- Inventory aging, subsequent sales and the adequacy of the RMB104.9m inventory allowance; also the assumptions supporting Eve Lom’s goodwill valuation.
- The status and potential financial impact of the securities class action, and any changes to the company’s contingent guarantees.
- Current compliance and filing requirements for the VIE structure, data protection, licenses and any future offshore financing.
- Potential shareholder dilution under the 2022 incentive plan and the impact of the dual-class structure, under which Class B shares carry 20 votes each.