Ladies and gentlemen, good day and welcome to the Yatsen Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irene Lyu, Head of Strategic Investments and Capital Markets. Please go ahead..

Thank you, operator. Please note, the discussion today will contain forward-looking statements relating to the company's future performance and are intended to qualify for the Safe Harbor from liability, as established by the U.S. Private Securities Litigation Reform Act.

Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion.

A general discussion of the risk factors that could affect Yatsen's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law.

During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today.

Joining us today on the conference call from Yatsen's senior management are Mr. Jinfeng Huang; our Founder, Chairman and CEO; and Mr. Donghao Yang, our Director and CFO. Management will begin with prepared remarks and the call will conclude with a Q&A session. As a reminder, this conference is being recorded.

In addition, a webcast replay of this conference call will be available on Yatsen's Investor Relations website at ir.yatsenglobal.com. I will now turn the call over to Mr. Jinfeng Huang. Please go ahead..

Thank you, Irene, and thank you everyone for joining today's conference call. So our net revenue grew by 6% year-over-year to RMB 1.3 billion in the third quarter, in line with our guidance.

We made significant progress with our skincare brands in the quarter, which increased to approximately 15% of total gross sales, compared to around 14% during the prior quarter and around 5% during the same period last year.

Since the premiumization of the Perfect Diary brand and an increase in skincare sales, our gross margin increased by 2.2 percentage points year-over-year to almost 58%. So we saw a significant deceleration in general consumer and color cosmetics spending in China this quarter.

According to the China National Bureau of Statistics, general consumer retail spending and beauty retail spending, each recorded year-over-year growth of approximately 5% in the third quarter, with even slower sales growth in Tmall’s color cosmetics category.

The industry-wide slowdown extended into the Singles' Day promotion period between November 1 and November 11, 2021, during which color cosmetics sales on Tmall fell by low single digit compared to the prior year.

So this industry trend is historical in nature, driven by macro economies uncertainty and the unusual seasonality pattern caused by the COVID-19 pandemic last year. Our business is, likewise, undergoing significant changes.

Gross sales from our color cosmetics brands, which make up approximately 84% of total gross sales, decreased by mid-single digit year-over-year in the third quarter. These results were mainly due to our continued realignment of Little Ondine, partially offset by the steady performance of Perfect Diary and Pink Bear.

Gross sales from our skincare brands, which include Abby's Choice, DR. WU, Galenic and Eve Lom grew by around 257% on a year-over-year basis. In the majority of this, this quarter's sales come from colors cosmetics. This factor inevitably slowed the group's overall growth.

Despite these changes, we remain one of the largest publicly listed pure-play beauty companies in China by revenue size during the third quarter. Perfect Diary was once again the largest color cosmetics brand on Tmall channels in terms of sales.

And Tmall ranked Pink Bear as number one new domestic brand -- domestic color cosmetic brand during November Singles' Day event. Even Lom and DR. WU sales on Tmall grew by 100% and 1,400% respectively, while Galenic visitor in geo product was the top selling imported facial series during the Singles' Day period.

The overall gross sales from our skincare brand grew by around 477%, compared to the prior year Singles' Day period, underscoring the strength of our skincare business this year.

As we look to the near future, we are committed to sharpen our growth model, which is underpinned by three pillars, continued investments in our brand equities, commitment to developing world-class R&D capabilities, and focus on sustainable growth.

We expect the implementation of these growth initiatives to take multiple quarters to produce results, but we believe we are on the right path to future success. We have already seen positive results from our efforts to upgrade and refine the Perfect Diary brand.

At the China Cosmetic Conference, known as the Davos Forum of the beauty industry, the 2021 [indiscernible] Growth Awards named Perfect Diary as the most influential brand for the second consecutive year, a strong endorsement of our continued innovation.

We introduced several effective new products in the third quarter such as the Stiletto Lipstick with halo color and unique microsphere wrapping technology. And the red new lip stain with the ever stain technology.

So bolstering our leading position in the color cosmetic area, we also unveiled a series of new products through IP crossovers and collaboration with well-known brands in other fields such as owner of King Eyeshadow Palette and kit yoga gift box.

Furthermore, well-known Chinese celebrities [Indiscernible] joined with international acclaimed Chinese actress Joe Chen to server as the joint most person for Perfect Diary further strengthening our brand recognition. Now, let's look at other brands.

Little Ondine continually gaining traction among young consumers, specifically powered by a new product launch such as our IP crossover and the opening of our first offline physical stores in Shanghai TSF Mall in September. So building on our momentum from last quarter, we also continued to invest in our Pink Bear brand.

In the third quarter, we developed a new lip gloss using ThinTouch technology as well as the new eye shadow collection, which resonated strongly with Pink Bear's diverse young community. Pink Bear also engaged Chinese singer and actress Han Xue as its spokeswoman reinforcing Pink Bear's positioning as the brand of choice for young girls.

Now turning to our skincare category. We completed several integration initiative for Galénic and Eve Lom, during the first half of the year and began to ramp-up both brand marketing and branding activities in the third quarter.

So in early September, we appointed Chinese Supermodel He Sui and famous Chinese actor Yang Yang as Galénic and Eve Lom's brand ambassadors respectively, accompanied by high-profile publicity and media events.

And given that prestige brand building take patients and efforts, we expect to continue investing in branding and marketing for these two brands while steadily adding new core SKUs on the product categories over time.

On the R&D front, we increased R&D expenses to 2.7% of total net revenues in the third quarter compared with 1.1% in the period -- in the prior period. We also established an innovative skincare laboratory with Ruijin Hospital, dermatological department as well as R&D collaboration platform with Sun Yat-sen University during the quarter.

Ruijin Hospital part of Shanghai Jiaotong University School of Medicine is a Grade III level general hospital with an enormous 100 year history. Its dermatology group department is a nationally renowned national-grade clinic specializing in the diagnosis and achievement of refractory skin disease.

Our three-year joint R&D program with Sun Yat-Sen University will focus on efficacy's new ingredients and formulas to adjust specific skin issues. Our collaborations with these two preeminent esteemed research institutions will significantly bolster our open lab R&D capabilities.

So additionally, during the third quarter, we completed our investments in Huizhi Weimei [ph] [indiscernible], an innovative company focusing on R&D of micro-ecological skincare products. So founded in 2018 Huizhi Weimei owns Yanteen [ph], a micro-ecological skincare brand, endorsed by dermatologists.

By leveraging our online and offline resources as well as open lab R&D capabilities, we will further promote the development of Yanteen.

The quarter also included an investment in [Indiscernible] Biotechnology, a cutting-edge company focusing on the development of industry-leading pharmaceutical products with product pipeline covering medical accessories innovative duty jobs, cell therapy and small molecule immunology immuno-oncology.

With this investment we intend to stand at the forefront of developing cutting-edge biomedical technology for future potential applications in the field of beauty. So lastly, the final key of our evolutionary strategy is our framework for sustainable growth, which encompass both sales growth and cost optimization elements.

In the near-term, we plan to focus on increasing sales contribution from our Masstige and Premium skincare brands, such as DR. WU, Galénic and Eve Lom, which provides excellent gross margins and higher quality growth.

Meanwhile, we will seek opportunities to increase sales contribution from non-traditional channels, where we see room for sustainable growth and incremental sales penetration. In terms of cost optimization, we aim to continue to improve our performance-based marketing ROI and shift more resources to branding investments.

While we may sacrifice certain low quality growth in the short-term, we believe this optimization strategy will enable us to build brand equities across our portfolio and sustainably reduce sales and marketing spend over time. We also plan to optimize our fulfillment and G&A expenses in the near future, should be aligned with our new growth strategy.

We expect that these initiatives will enable us to achieve sustainable growth with a near path to profitability in the medium to long run. So in closing, before I hand it over to Donghao, I would like to reflect on the journey that has brought us here. Yatsen celebrated its fifth birthday in September.

So while I'm proud of our team's achievements since Yatsen's funding, I remain as determined as of one day on day one to ensure Yatsen's continued success in the next stage of its development.

Our focus on sustainable growth will entail some short-term adjustments and may take time to produce results, but we are confident that this is the right moment in Yatsen's development for this essential shift. As we navigate this period of unprecedented challenges, we are optimistic about Yatsen's future.

To further demonstrate our confidence in the company's prospects, our Board of Directors have authorized a US$100 million share repurchase program to be completed over the next 24 months. So, thank you everyone. With that, I will now turn the call over to our CFO, Donghao Yang to discuss our financial performance..

Thank you David, and hello everyone. Before I get started, I would like to clarify that all financial numbers presented today are in renminbi amounts and all percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenues for the third quarter of 2021 grew by 6% to RMB1.34 billion from RMB1.27 billion in the prior year period. The growth was primarily attributable to increased sales from our newly launched and acquired brands.

Gross profit for the third quarter of 2021 increased by 9.6% to approximately RMB911.8 million from RMB831.6 million in the prior year period. Gross margin improved by 2.2 percentage points to 67.9% in the third quarter of 2021, as compared with 65.7% in the prior year period mainly due to increased sales from higher margin brands and products.

We have also seen an increase in sales from our skincare brands this quarter enabling us to achieve higher average order value and better margin. Total operating expenses for the third quarter of 2021 decreased by 13.2% to RMB1.28 billion from RMB1.48 billion in the prior year period.

As a percentage of total net revenues, total operating expenses decreased to 95.4% from 116.6% in the prior year period. Fulfillment expenses for the third quarter of 2021 were RMB100.2 million, as compared with RMB91.5 million in the prior year period.

As a percentage of net revenues, fulfillment expenses increased to 7.5% from 7.2% in the prior year period, primarily due to an increase in customer service expenses and share-based compensation expenses compared to the third quarter of 2020, partly offset by a slight decrease in fulfillment logistics expense.

Selling and marketing expenses for the third quarter of 2021 were RMB911.3 million as compared with RMB864.3 million in the prior year period. As a percentage of total net revenues, selling and marketing expenses were 67.9% compared with 67.5% in the prior year period.

However, on a non-GAAP basis which excludes expenses related to share-based compensation and amortization of intangible assets, selling and marketing expenses were 64.9% of total net revenue compared to 67.5% in the prior year period. This was a result of our focus on improving our selling and marketing expenses ROI.

General and administrative expenses for the first quarter of 2021 were RMB233.9 million as compared with RMB515.9 million in the prior year period. As a percentage of total net revenue, general and administrative expenses for the third quarter of 2021 decreased to 17.4% from 40.7% in the prior year period.

The decrease in percentage was primarily due to lower SBC expenses compared to the same period last year, partly offset by an increase in salaries. Research and development expenses for the third quarter of 2021 were RMB35.8 million compared with RMB14.4 million in the prior year period.

As a percentage of total net revenue, research and development expenses for the third quarter of 2021 increased to 2.7% from 1.1% in the prior year period. The increase was primarily due to higher personnel costs and share-based compensation expenses reflecting our commitment to enhancing our R&D capabilities.

Loss from operations for the third quarter of 2021 decreased by 42.7% to RMB369.3 million from RMB644.6 million in the prior year period. Operating loss margin was 27.5% as compared with 50.9% in the prior year period.

Non-GAAP loss from operations for the third quarter of 2021 increased by 11.9% to RMB221.7 million from RMB198.1 million in the prior year period. Non-GAAP operating loss margin was 16.5% as compared with 15.6% in the prior year period.

Net loss for the third quarter of 2021 decreased 43.8% to RMB361.8 million from RMB643.8 million in the prior year period. Net loss margin was 26.9% as compared with 50.8% in the prior year period. Non-GAAP net loss for the third quarter of 2021 increased by 9.6% to RMB216.3 million from RMB197.4 million.

Non-GAAP net loss margin was 16.1% as compared with 15.6% in the prior year period. Net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the first quarter of 2021 decreased to RMB0.57 from RMB6 in the prior year period.

Non-GAAP net loss attributable to Yatsen's ordinary shareholders per diluted ADS for the third quarter of 2021 decreased to RMB0.34 from RMB1.2 in the prior year period. Looking at our business outlook.

For the fourth quarter of 2021, we expect our total net revenues to be between RMB1.57 billion and RMB1.67 billion, representing a year-over-year decline of approximately 15% to 20%, primarily.

As David mentioned earlier in the call, we expect the high comparison base and our future emphasis on higher quality growth to factor into this projected performance. This forecast reflects our current and preliminary view on the market and operational conditions, which is subject to change.

The Company's Board of Directors has approved a share repurchase program whereby the Company is authorized to repurchase up to US$100 million worth of its ordinary shares over the next 24 months.

The Company's proposed repurchases may be made from time to time through open market transactions at prevailing market prices, in privately negotiated transactions, in block trades and/or through other legally permissible means, depending on the market conditions and in accordance with applicable rules and regulations.

The Company's board of directors will review the share repurchase program periodically, and may authorize adjustment of its terms and size. The Company expects to fund the repurchases with its existing cash balance.

As of September 30, 2021, the Company had cash and cash equivalents and restricted cash of RMB3.63 billion, as compared with RMB5.73 billion as of December 31, 2020. With that, I would now like to open the call to Q&A.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Dustin Wei with Morgan Stanley. Please go ahead..

Thanks for taking my questions. First question regarding guidance for fourth quarter.

So this 15% to 20% year-on-year decline, is there any one-off adjustment in terms of for example, the store closure for Perfect Diary brands or further sort of reduction of SKU regarding Little Ondine or Abby's Choice? Question number two, regarding the outlook for next year.

So based on the current assessment for the macro industry dynamics, I remember last call, we kind of talked about like 20% to 30% year-on-year growth without considering the acquisition, could be sort of the range to look at for next year. But what's the refreshed view for the next year? The third question regarding competition.

So it seems like the global brands, especially, the prestige color cosmetics are coming back in terms of the ranking and the growth rate. So what's management's view on that? Thanks a lot..

Thanks, Dustin, for your questions. Well, in our guidance, well, of course, there will be some one-off expenses regarding closure of some of our non-performing stores, but that's not going to be a major item in our -- a factor in our guidance.

So, I mean, our guidance, as we said in our statement reflects our current view on our business performance for the next quarter. So I don't think there is any particularly large one-off items included in the guidance. Your second question about next year's projections. Well, actually, we do not give guidance for the full year next year.

So the only guidance we give is for the following quarter. But, again, as we said earlier in the call, the market environment is changing rapidly, including the competition. As we mentioned in question number three, from overseas brands, it is intensifying and also there has been dramatic change in the retail sales channels that we have to deal with.

So I don't think we're in a position to give any specific guidance for the full year next year. Competition, well, I think the competition from those overseas brands is intensifying especially during the 11.11 shopping festival.

Well, what we've seen is, a lot of the prestige foreign color cosmetics brands have offered deep discounts, really deep discounts for their products. Part of the reasons is probably, a lot of them are global companies and their sales are declining anywhere else outside of China.

So China is probably the only place where they can generate some meaningful sales. So, for example, there is one brand, I'm not giving you the name here, but that one brand used to be masstige -- in the masstige segment. But during the 11.11 shopping festival, they offered deep discounts kind of like buy one take one free type of deals.

So they're trying to generate more meaningful sales through big discounts.

So, David, do you want to add to that answer?.

Sure. Thank you. The first thing is about the other competition. So in the Singles' Day we saw this year a very aggressive promotion and discount tactics adopted by global brands. And also those global brands has booked a lot of the loss with the top tier house, like Austin Li and Avera who dominated the remaining traffic and GMV at Tmall.

So the combination of both factors significantly impacted our sales during Singles' Day. So if you look at the top 10 beauty brands in the Tmall's Single's Day promotion, so there is no color cosmetics brands in their top 20 brands. Last year Perfect Diary was 11 -- was ranked 11.

And so I think that's a very important factor reflecting the very deep promotion on skincare brands and also the traffic mainly gained by the -- by Austin Li and Avera.

So looking forward about -- what we see about the competition, I think this is -- it's not going to be a sustainable positive trend year by the global brands, because it will significantly improve -- significantly hurts their premium brand image.

So after Q4 we -- so during the past one or two weeks, we see the global brand sales is kind of like remaining to a normal. And also, we right now, for our brands, we are trying to gain more shares after the Singles' Day promotion. So looking forward about next year's growth guidance, for sure, we are not going to able to provide an exact number here.

The one thing I want to call is that, right now, the whole company is taking a transition strategy, which means we are improving our sales in skincare brands. And then, right now, skincare brand is taking almost 14% of the revenue in Q3. And then total number will be almost increased to 20% in Q4.

So looking forward, we believe the percentage of the sales of skincare brands will continue to increase in next year. And the growth -- the high growth rate of the skincare brands will also help to bring the company's growth to normalized stage. However, I think, this might take a few quarters to reach that.

So I think, the investors need to be patient about what we are doing right now, because we believe that's the right path to go..

Okay. Thanks a lot for sharing. Indeed, that's a quite challenging environment. So best of luck. Thank you very much..

Thank you so much..

The next question comes from Stephen Yang with Goldman Sachs. Please go ahead..

Thanks for the sharing of that, management. So I have two questions. One is on buyback. So would you mind sharing more color regarding the rationale behind the buybacks and the timing? And also what does the management think about on the forward-looking basis the cash usage. Whether it's going to be used more on buybacks or more M&As, et cetera.

And the second question is regarding the efficacy regulation. So I have management team, an impact from the new asset efficiency regulation to, for example, product launch or any change in your competitive dynamics? Thank you..

Yes. For the first question regarding buybacks, so currently the management will be -- our current market cap is undervalued. And given what we're seeing with our transition, though it may take several quarters to show the results, we're very confident of the company's long-term prospects.

So we think it's a great time to start a buyback growth program with the existing cash balance given that we still have ample cash reserves. Timing-wise as mentioned earlier, we -- the Board has authorized a buyback of up to US$100 million for the next two years. So we see that -- as time come and when we see fit.

And then for the second question on regulation, I think David, do you want to take that question on the part of the regulation?.

Yes, sure. So overall, we have been discussing with the regulators and the related government, the department and the leaders in the past few months. I think overall if you're looking at the regulation trend there will be more and more regulation coming out in the coming quarters.

So, again, the key reason behind is the government is trying to regulate the industry and also to guide the development for the future product launch and brand development.

So the new efficacy regulation you just mentioned about, so right now I guess because of our very close relationship with the government officials and also the -- our OEM, ODMs so right now we are satisfying the new regulation development.

However, in order to lead in this part, we are taking a few new initiatives to strengthen our product efficacy test. So as I mentioned before, so right now we are devoting more and more resources to R&D.

And one of the a few initiatives we are going to take is we are going to strengthen the clinical test for our product test before we launch the market.

So -- and also the collaboration with the region hospital, we were very -- will strongly help us to establish the R&D capability and also the product design profitability in the dermatologist skin care area.

So for those products, we believe we'll be very strongly relying on the efficacy test and also the relationship we set up with the top dermatology hospital in China. So right now, we think that this trend is going to give more impact on the industry. And Yatsen is taking enough initiative to be leading this share in the future..

Yes. Thanks management. So if I may have a follow-up question maybe on the ROI regarding -- so we see a quite an improvement Y-o-Y on selling expenses. I just wanted to get a sense of what do you think about the colors cosmetics industry-wide ROI trend going forward? Is it going upwards or downwards? Thank you..

The ROI of skincare overall is higher than the color cosmetics. So if we look at the non-GAAP sales and marketing expenses in the Q3, we can see a decline over there. One of the key reasons is that we keep optimizing the ROI for our existing brands.

So looking forward with our continuous investment in the skincare brand and also we are optimizing the sales channel for our brand portfolios, we will see an improvement of that pie as well..

The next question comes from Luzi Li with Bank of America. Please go ahead..

Hi management. Thank you for taking my questions. So my first question is, do we have a breakdown for Q3 or for Q4 today about the channel? So you mentioned that we might invest into more on the unconventional channels. So just would like to get a sense about the latest breakdown.

So, my second question is, you just mentioned that it may take several quarters time to see some transition results.

So how do we understand the transition results? Will it be like -- so in terms of the earnings side, so would it be like sales return to positive growth? Or what kind of level of sales growth? Or we're looking for bottom line breakeven? So which one is our priority.

So what is the timetable? So is it in the next year or even longer time? So, my third question is also about the SG&A ratio or particularly the selling and marketing expense. So what is the fixed cost part? Thank you..

The first question about the sales channel fleet. So, right now, I think, Tmall is taking around like 40% of the sales for the total company. We see the percentage is declining. And our percentage in the last stream especially in Douyin is increasing. So looking forward, we think this trend will continue as well.

But the things like in the past three months, I guess, the company has been taking some initiatives to optimize our sales in Douyin. Douyin right now is becoming a very important factor for brand growth. We see the first stage of the Douyin sales is mainly coming from the discount.

So if you look at some of the skincare brands, the benefit from the first stage of the Douyin’s last streaming development is very big discount for their skincare products. However, if you look at some of the recent development of Perfect Diary’s ranking in Douyin. Perfect Diary's ranking is going -- is increasing really fast.

So right now if I remember correctly, Perfect Diary is ranking around number three or number four in Douyin color cosmetic, but could be high growth rate than other brands. So I think we saw a commitment to continuous like investing in that channel. The percentage of the Douyin will increase in the future as well.

So going back to your second question about the brand focus. I think, so we share with the public that we are going to take some change for our strategy, which is devoting more resources into the skincare development. So looking at the past Singles' Day, our skincare growth is very robust and then we saw almost 500 percentage growth versus last year.

Looking forward, we believe the skincare brands will take a higher percentage of the total company's revenue. So right now what we are focusing on is on the premium brands including Galénic, Eve Lom and also the masstige brand DR.WU.

So, the three brands is on trend and then -- and also for each of the brand proposition is -- we believe there's good potential to monetize the brands' positioning. For example like DR. WU right now the brand has grown really fast mainly because of two hero products. And we plan to launch another two or three hero products in the coming year.

So, with the product and the category expansion of DR. WU, the brand will grow to -- we're confident about the brand's growth in the next year. For Galénic, there is some impact because of the supply chain. So, right now the brand has been -- the hero product of the BC serum has been sold out in the past few months.

In the coming one or two months, we think the supply chain challenge will remain. However, we took initiative to solve the supply chain problem and then with the supply chain running up, I guess, the -- so we believe the sales of Galénic will significantly improve in the coming quarters as well.

And also we -- after the first staged effects of the BC Serum of Galénic, we are going to launch Abby's Skin Care products and also serums in Q1 and Q2. So, with the product lines expanding, we think the growth for Galénic will also benefit from that.

So, talking about Eve Lom, so the cleanser has been remaining very strong in the Singles' Day promotion, it's the most premium cleanser in Singles' Day promotion and also the sales is ranking top for the cleanser category also, so therefore the premium cleanser category.

And we didn't see any other competitors in the premium price tier launching or competing with Eve Lom for the cleanser. I think the key next step for Eve Lom is to expand product category on top of the cleanser. So, in the past quarter, we launched rescue mask and we had initial success.

So, in the coming quarters, we have sufficient quarter launch high level for Eve Lom. So, with we said, we think the three skin care brands will benefit from what we designed for the growth strategy..

The next question comes from [Indiscernible] with CICC. Please go ahead..

Thanks for taking my questions. The first regarding the profit profitability, it seems that the promotion of Perfect Diary increased during the Singles' Day.

I wonder if there is any pressure on the company's fourth quarter gross margin and operating margin? The second regarding the industry outlook, as we've seen softer industry environment for color cosmetics, how do the management see the color cosmetics market in the next three years and the future of the -- domestic color cosmetics brands? Thank you.

thanks a lot..

Go ahead Jinfeng. Go ahead..

I heard the first one. What is the second question? Hello. Okay, I will go with the first one. So, for the Q4 if you look at the percentage of the -- just in these live streaming, the percentage of Perfect Diary is low for the total revenue. So if you look at the AOV of Perfect Diary, it's actually increased in the past Singles Day.

So we didn't see a challenge coming from the gross margin. So that's the first question -- my answer to your first question. So I missed your second one, sorry..

Well, I think the second question is about the outlook of color cosmetics business or market in China for the next 30 years. I mean, it's a really long-term perspective. So David, do you have anything to say on that prime color cosmetics Chinese market for the next 30 years? If I got that one correctly..

I did not hear very clear about that part. But talking about the color cosmetic industry, if you look at the -- in the past Singles Day promotion, as I mentioned before there's no color cosmetic brands ranking in the top 20 brands. So, I guess, looking forward so we still are confident about the color cosmetics growth mainly driven by two things.

One thing is the penetration increase. The second one is about premiumization. So I guess the challenge for our existing brand portfolios is that the -- because of the -- in a Singles Day, the global brands has very deep price cut for their color cosmetic products. And then -- so we see a very clear premiumization for the makeup industry.

But I don't think that that is going to sustain in the coming quarters. So looking forward there is no -- there's only a few domestic brands playing in the makeup industry. So, I guess, right now there are only three main companies still trying to gain shares in the color cosmetic area.

So, I guess, there will be a consolidation trend in the coming year less than because we take a multi-brand strategy. So we have a Masstige brand, we have Mass brand and also we have a new brand to get more of the new entrants into the category.

So I guess with the multi-brand strategy, we are in a very good position if we can take the consolidation period in the coming quarters in the color cosmetics area..

The next question comes from Helen Xu [ph] with CITIC Securities. Please go ahead. Helen, your line is open, and you may ask your question to management. The next question comes from Helen Xu [ph] with CITIC Securities. Please go ahead..

Good evening. Helen Xu from CITIC. The first one….

Helen, your line is open, and you may ask your question to management..

Hello.

Can you hear me?.

Sorry, we can't hear you. We cannot.

Can you repeat your question?.

Sorry, can you hear me?.

It’s much better now..

Okay. Helen Xu [ph] from CITIC. I have three questions. First one, if we broaden our view outside the brands of Yatsen that's to say equally broaden our views towards all the DTC Internet new brands.

What are the reasons that DTC brands are bearing through weak growth even shrink? And the second question is how to improve customers' loyalty towards our brands, especially makeup? And the third question is how long can the cash support our business considering the operating cash flow and the potential M&A? Thank you..

I think the first one about the DTC makeup brands, the key reason is not just the DTC makeup brands, essentially the whole trend makeup market being slowed down in the Q3 and also the Singles' Day promotion. So I guess one of the part of the reason of the slowdown was due to the seasonality caused by the COVID-19.

So Q3 and Q4 last year was high base when consumers picked up spending after COVID. So this is also why we are giving a conservative guidance in Q4 as well.

So looking forward, so when we are thinking about the China strategy of our fresh brand Perfect Diary, we believe at this stage it's also an initiative and necessary steps to optimize the sales channel for the brand as well. So the second one talking about the customers' loyalty. So I guess there are a few things we can do. The first one is R&D.

So in the past quarters we launched the Pearl loose powder supported by the Smartlock Technology, which is developed with the Guangzhou Yiyan [ph]. So the second -- mainly because of the technology and also the product performance, right now we see the product growth is pretty remarkable.

The second thing talking about the loyalty is about the category expansion into the foundations to the base-makeups. Previously for Perfect Diary, the brand mainly focused on the lead category and also the eye category. So the expansion into the base makeup for Perfect Diary is very important.

So that's why we launched the loose powder, the pearl loose powder. And we launched a new BB cream. We launched a new cream foundation. So those are the new initiatives we launched in the past quarters. And then right now we are seeing a pickup trend for those new initiatives.

So with that, I believe it will be the right path to improve the customers' loyalty.

Talking about the cash question, I guess how about Irene to address that?.

Sure. Yes.

Regarding your third question on cash and also M&A, potential M&A so currently we have RMB3.6 billion on cash at the end of Q3, which I think -- we think is sufficient to meet our operating needs for the near future, including the potential buyback plan for our medium-term goal is to continue to improve our profitability and eventually break-even profit making and we don't foresee the company to be moving cash for long-term.

And then regarding M&A, we have been continuing looking at opportunities. And actually, as David mentioned, we have also recently acquired a very small skincare brand focusing primarily on microbiome or micro ecological brand endorsed by dermatologists.

So given the -- there are a lot of uncertainties right now in the global -- in the China economy and also the beauty industry for our M&A, right now we're primarily looking at small- to medium-sized transactions or brands that can prove to be high potential in the future rather than looking at large transactions.

So given that's our strategy right now we feel -- with our current cash level, it's ample to continue to pursue new M&A opportunities in the future..

Okay. Thank you. Thank you, David and Irene..

Thank you..

This concludes our question-and-answer session. I would like to turn the call back over to management for any closing remarks..

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at Yatsen directly or TPG Investor Relations. Our contact information for IR in both China and the US can be found on today's press release. Thank you again and have a great day..

Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..