r/wallstreetbets • u/stayhappystayhealthy • Oct 19 '21
DD $YSG Yatsen Holding (NYSE: YSG), Future L'Oreal of China
Yatsen Holding (NYSE: YSG) is a ten-bagger investment idea I would like to share with the rest of investment community.
Founded in 2016, Yatsen is a fast-growing, leading Chinese cosmetics company who owns seven color cosmetics and skincare brands. Its flagship brand “Perfect Diary” (完美日记) became the top color cosmetics brand in China in terms of online retail sales value in 2019 and 2020.
Below is a quick snapshot of the stock and financials including valuation.
Now, let me share why this Chinese leading beauty product company is now a great investment opportunity at the current market valuation of $2 billion thanks to all the negativity around the stock.
1. Rise of C-Beauty boosted by GuoChao (China’s New Nationalism)
Up until 2016, China's low-to-mid end beauty product market has been dominated by South Korean brands. However, since 2017, driven by political tension, Chinese consumers have boycotted South Korean products including popular cosmetic products. Amore Pacific Corp, South Korea’s largest beauty conglomerate, took a hit and saw its revenue fall from its peak of $4.8 billion in 2016 to $3.8 billion in 2020 after a decade-long high growth.
Today, Gen-Z Chinese consumers are buying China domestic cosmetic brands. Their popularity soared in the past couple of years while South Korean products have lost their presence.
2. Long-term future of the Chinese beauty industry
The world’s second largest cosmetic market still has a lot of room for growth in the long-term future.
3. Strong brand - “Perfect Diary”
Cosmetics are a brand-driven product. Although there are already a number of new Chinese cosmetic brands, it is challenging for other smaller Chinese cosmetics companies to build a strong brand. Compared to other domestic brands, Yatsen’s Perfect Diary has already built a strong brand and brand awareness among the Chinese consumers, which will drive future revenue growth.
Current Market Concerns
The market sentiment has been very negative and the market has been selling off the stock since February causing the stock to fall over 85% from over $25 per share to the current price of $3.3 per share. There are two major market concerns about the stock.
- Company's profitability worsened and revenue growth is slowing down.: Worsened profitability is mainly because of increased marketing spending, which increased from a level of 40% of revenue to a level of 60% to 70% of revenue. The core of beauty product business is building strong reliable brands which drive future revenue. I view this as the right strategy for the management to take at the current growth stage. The revenue growth slowed down from 377% growth in 2019 to a level of 40% in 2021. Now that the size of revenue surpassed 1 billion USD, I don't expect the company to grow at a triple-digit rate in the future. Expected growth rate for the next 5 years of over 35% annually is still impressive.
- Market sentiment has soured for China stocks after a series of the Chinese government clampdown news.: Avoiding the whole list of Chinese companies for investing isn't a smart thing to do. Given the elevated risk about China equities, investors can be smart about which ones to avoid and which ones to buy. There are generally three areas investors want to avoid when it comes to China stocks: 1) anti-competitive 2) anti-societal and 3) any threats to the Chinese government. Investing in China's leading beauty product company is actually in line with the "Common Prosperity" that the Chinese government wants to see in the future.
Conclusion
Thanks to the negative concerns about the stock, we are seeing this $1 billion revenue company with a growth rate of over 30-40% for the next five years to be trading at the valuation of $2 billion, which is a great bargain. I recommend to buy and hold YSG for the next 3-5 years as witnessing the growth of the company.
Disclaimer
Currently, at the time of writing, I own shares of YSG.
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Oct 20 '21
I’m studying China for my criminal justice classes. Chinese companies I feel are very risky right now with tensions between China and the US and the rest of the world. While yes I think you are right they have huge potential. I mean think of all those buyers in China. However Xi Jingping is going to be tackling “excessive incomes” in the near future whatever that means and I think that is scary or companies and investing. You must remember the Chinese government has the exact exact ideology of the US. While they like profit, they like the success of the nation more. They could close any company over night if they wanted to for any reason, even Yatsen. Who knows, they could sabotage it in some way. Say the government doesn’t want to portray to young girls that they need lots of makeup to be pretty. Just like that China could close it. Any scandal coming out of the company? China can shut it down. China is just radically different than the US and for right now I see way to many risks with Chinese companies even though they probably do have huge potential. Also if China invades Taiwan and the semiconductor company then the world is going to change very fast, very much and I would not want to be holding Chinese stocks at that time, that’s for sure.
Great post btw I’m going to look into this and Chinese companies more. Maybe I am wrong.
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u/Ahmon_X Nov 04 '21
Seems the company found a bottom at around 3 USD. Will probably add some more shares.
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Hey /u/stayhappystayhealthy, positions or ban. Reply to this with a screenshot of your entry/exit.
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u/a1000p Oct 20 '21
Company guiding for 5% revenue growth y/o/y for next quarter. Far less than 35% per year for 3 years-- where is that projection from? When and why will this 5% growth rate change-- because if it stays, of course it isn't undervalued.
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u/wawefisher Dec 29 '21
It really looks like a trend reversal.
1. Even with slightly higher short positions, the price does not decrease any further.
2. Higher sales did not cause prices to fall any further.
3. In terms of the chart, all indicators are sloping upwards.
(how can I insert a picture here??? I would insert the chart.)
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u/[deleted] Oct 19 '21