The company is using technology for things like new ingredient discovery as Chinese consumers seek increasingly individualized products

image credit: Bamboo Works

Key Takeaways:

  • Yatsen is turning to AI and other high-tech methods as consumers look for skincare and cosmetics products to meet their individual needs
  • The company fell back into the red on a non-GAAP basis in the second quarter as its gross margin deteriorated and it spent heavily on marketing

It’s known for the everyday cosmetics and skincare products sold at its well-known chain of Perfect Diary stores across China. But these days, Yatsen Holding Ltd. (NYSE:YSG) is turning to AI, biotech research and automated manufacturing as it seeks an edge in China’s fiercely competitive market, where increasingly sophisticated consumers are demanding new leading-edge products that are more than just the same old story in prettier packaging.

At its Guangzhou manufacturing hub, a joint venture with South Korea’s Cosmax (192820.KS), the New York-listed company is combining automated production and a new generation of quality-control systems with AI-assisted ingredient discovery, formulation development and clinical assessment to quickly bring new targeted beauty products to market.

Spanning 78,000 square meters, the state-of-the-art manufacturing facility began operations in 2023. Billed by the company as Asia’s largest single cosmetics plant, it serves as the production hub for its various product line, including Dr. Wu, Perfect Diary, Little Ondine and Pink Bear. The massive facility, viewed by Bamboo Works at a media event in Guangzhou last week, is central to the company’s broader effort to integrate product development, manufacturing and quality assurance. All that is happening as it rapidly expands a skincare business that surpassed its older cosmetics line to become its biggest revenue source last year.

Focused on China

China remains Yatsen’s top priority, though it’s also exploring opportunities globally, Chairman David Huang told reporters on a tour of the facility last week. "We are starting to bring products into Asia and Europe, and potential other markets as well," he said.

Addressing a rise in marketing expenses to over 70% of revenue, Huang said Yatsen’s profitability had steadily improved, pointing out the company achieved a full-year profit last year on a non-GAAP basis. He explained that Yatsen remains committed to investing in brand building, as its existing brands have yet to reach their full potential. Those efforts, he added, are already raising brand awareness and improving consumer perceptions.

The strategy comes as Yatsen’s skincare business, which includes Galénic, Dr. Wu and Eve Lom, becomes its main growth engine. In the three months to June this year, the company’s revenue rose 5.1% from a year earlier to 1.14 billion yuan ($168.3 million).

Revenue from its skincare brands jumped 40.4% during the quarter to account for more than 70% of its sales, after passing the 50% mark a year earlier. Revenue from its older color cosmetics fell 35.8%, reflecting continued pressure on Perfect Diary and other makeup labels in a crowded Chinese market.

The divergence underscores Yatsen’s transformation to skincare. Aggressive digital marketing, celebrity partnerships and social commerce made Perfect Diary one of China’s best-known cosmetics brands in the company’s earlier days. But that model faces pressure from growing consumer caution and intensifying competition from both domestic and global rivals in a crowded market.

Yatsen reported a net loss of 90.8 million yuan in the second quarter, much wider than its 19.5 million yuan loss a year earlier. It also recorded a non-GAAP loss of 99.4 million yuan for the period, after being profitable on that basis a year earlier. Its gross margin fell to 73.9% from 78.3%, suggesting it still faces challenges in its transition to skincare.

As its business metrics struggle, Yatsen’s stock has lost more than three-quarters of its value over the last 52 weeks, giving back all the gains and more from a strong rally in the first half of 2025.

New brands

Asked whether it was considering buying another skincare brand or pursuing new partnerships, Huang said Yatsen remains focused on its existing brand portfolio, but added the company doesn’t rule out looking at other assets with strong brand equity and product performance.

"A multi-brand strategy has been part of the company’s vision since day one," Huang said, adding Yatsen sees potential to apply skincare technologies into color cosmetics, including through "makeup skintification." It introduced such products as early as 2023.

That company’s consumer focus is increasingly centered on functional skincare, an area where buyers seek products targeted at specific concerns rather than broad, general-purpose beauty claims, said Johnny Chen, general manager of the Dr. Wu line. He added that Chinese consumers were moving toward more specialized skincare products as they became more informed about ingredients, efficacy and their individual needs.

As an example, Chen cited Dr. Wu’s mandelic acid toning water, which recorded triple-digit year-on-year growth over the past few years, continuing into the first part of this year.

AI is also changing how consumers research products, the company said. Instead of passively receiving promotions from influencers and media, more are using AI tools to seek answers tailored to their age, skin type and specific concerns, making them more active in assessing potential different solutions.

The company is investing heavily to underpin its marketing claims with research. Yatsen has spent more than 770 million yuan on product development since 2022, and R&D expenses represented about 3.3% of its revenue in the latest quarter. It operates research centers in Shanghai, Guangzhou and Toulouse, France.

The Guangzhou center in the city’s Conghua area includes a 3,000-square-metre testing center with instruments valued at more than 10 million yuan, according to the company. The center monitors more than 50 quality parameters beyond typical industry standards, it added.

The factory also uses automated robotic arms and automated guided vehicles for materials handling and packaging. Solar power, wastewater recycling and purification systems form part of its sustainability and efficiency program, Yatsen said.

Yatsen works with scientists internationally and participates in joint research programs, the company’s Chief Scientific Officer Jing Cheng said. Its European research presence also helps the company study differences between consumers in Asia and Europe, with those insights feeding into product development.

AI is a key part of that effort. Yatsen said it began building AI capabilities early and has applied them across all its brands, not just Dr. Wu. The company said it uses AI tools to screen active ingredients, identify biomarkers and explore combinations of ingredients to amplify efficacy. It is also using AI to develop new molecules, some of which remain in the pipeline.

Yatsen said it was a pioneer in China by using AI-based molecular docking to identify three PDRN efficacy boosters, thus enhancing the product’s anti-aging efficacy. The company said the technology shortened ingredient discovery from years to just months.

For now, Yatsen is positioning its Guangzhou manufacturing base as a link between consumer research, product development and scalable production. Its challenge will be to show that investments in science, AI and more tightly managed production can deliver products that meet increasingly specific consumer needs and create a durable competitive advantage in China’s fast-changing beauty market.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.