Chapter 6

China Structure

The cash and securities that make up roughly three-quarters of Yatsen's market value are held inside a China-domiciled, VIE-topped structure, and their accessibility is uneven. The part that depends on unenforceable contracts — the consolidated VIE — carries only about 3% of revenue and 11% of assets, and a majority of the group's liquid cash already sits offshore at the Cayman parent. What is genuinely encumbered is ¥721.5 million of PRC net assets, a repatriation tax haircut, and the entire ¥653.6 million investment portfolio, most of it inside the VIE itself. The listing overhang has receded since 2022 but is re-assessed every year.

Where the business actually sits

Yatsen Holding Limited is a Cayman Islands holding company with no operations of its own; it reaches its China business through wholly-owned subsidiaries and, for one slice, through a variable interest entity it does not legally own but consolidates under U.S. GAAP as the primary beneficiary [1]. The distinction matters because control of that VIE rests on a set of contracts — a proxy agreement and powers of attorney, an equity pledge, an exclusive business cooperation agreement, and an exclusive call option — which, in the company's own words, "have not been tested in a court of law" [2].

The 20-F's condensed consolidating schedule shows how much of the business actually depends on those untested contracts. In FY2025, of ¥4,298 million of third-party revenue, the equity-owned entities — offshore and directly-held subsidiaries plus the wholly-foreign-owned enterprise (WFOE) — produced ¥4,166 million, or 96.9%. The VIE and its subsidiaries produced ¥132 million, or 3.1% [3].

Source: FY2025 Annual Report (Form 20-F), Financial Information Related to the VIE — condensed consolidating statement of income [4].

The same split runs through the balance sheet: the VIE and its subsidiaries hold ¥421.9 million of the group's ¥3,847 million of total assets (11.0%), and just ¥10.4 million of cash [5]. For a professional investor sizing the structural risk, this is the load-bearing fact. A Chinese internet or education company typically parks a licensing-gated business — sometimes most of its revenue — inside the VIE, so a legal challenge to the contracts threatens the whole enterprise. At Yatsen the beauty operations are overwhelmingly held through equity, and the VIE is a small residual. A disallowance of the VIE structure would still be damaging, but it would put a low-single-digit share of revenue directly at risk, not the business.

Source: derived from the FY2025 condensed consolidating schedules [6] [7].

The contracts themselves were re-executed recently. The proxy agreement and powers of attorney, the equity pledge, and the exclusive call option were all filed as "Third Amended and Restated" agreements dated December 1, 2025, alongside a fresh spousal-consent letter from the VIE shareholder's spouse; only the 2019 exclusive business cooperation agreement was left unamended [8]. A refresh of the pledge and option documents is routine housekeeping that keeps the contractual claim current; it does not make the arrangement any more enforceable in a PRC court than it was, but it does show the structure is being actively maintained rather than left to drift.

The cost of moving money up the chain

Because the VIE is not owned, cash reaches the parent only as service fees paid to the WFOE, and none have been paid: for each of 2023, 2024 and 2025, the VIE paid no service fees to the WFOE [9]. That is a small matter today only because the VIE holds so little cash. Where earnings do have to travel up from inside China, the tax leakage is real: the 20-F's own worked example takes ¥100 of pre-tax VIE earnings down to about ¥71 after a 25% enterprise income tax and a 5% treaty withholding, and to roughly ¥53 in the worst case where the intercompany fee structure is disallowed and the transfer is taxed twice [10]. Renminbi is not freely convertible, so currency controls sit on top of the tax [11].

The reassuring counterweight is where the liquid money already is. Of the group's ¥1,011 million of cash and short-term investments at year-end, the Cayman parent alone held ¥338.5 million of cash and all ¥246.0 million of short-term investments — ¥584.5 million, or 58%, sitting offshore and outside PRC transfer restrictions [12]. This is the residue of the 2020 IPO proceeds, which flowed into the holding company and never had to be routed into China. The net-cash floor that the valuation (Valuation and Cash) leans on is therefore more accessible than a "China-domiciled cash" label implies — the majority of it never entered the tax-and-controls maze at all.

Source: FY2025 condensed consolidating balance sheet; parent figure combines ¥338.5M cash and ¥246.0M short-term investments [13].

That offshore majority has, if anything, become more accessible over time. The share of the group's cash held in China climbed to a 50.2% peak at the end of 2023, as the offshore IPO proceeds were drawn down for buybacks, then receded to 28.5% by the end of 2025 [14] [15] — a reversal of the drift that had carried it from 12.8% at the 2020 IPO toward half the balance [16].

Source: liquidity disclosure, FY2025 20-F [17], the FY2023 peak [18] and the IPO prospectus [19]; intervening years from the FY2021, FY2022 and FY2024 20-Fs.

The part of the floor that does not travel as easily is the investment portfolio. The ¥653.6 million of long-term investments that the valuation counted as roughly a quarter of the balance-sheet value sits entirely inside China — ¥365.7 million of it, or 56%, inside the VIE, with the rest in the WFOE and other subsidiaries; none is held offshore [20]. For a bankruptcy-averse buyer counting the securities as part of the margin of safety, that portfolio is the least accessible piece: China-located, majority-held in the contractually-controlled entity, and — as the valuation chapter flagged — of uncertain realizability at carrying value.

Statute puts a ceiling on the strictly trapped amount. Under PRC law the group's PRC entities and the VIE's subsidiary can only distribute out of retained earnings and must first appropriate 10% of after-tax profit to a statutory reserve; the portion of their net assets that cannot be moved up as dividends, loans or advances was ¥721.5 million at year-end [21]. That is 24% of the ¥2,999 million of consolidated equity — just under the 25% threshold at which Regulation S-X would force separate parent-only financial statements, which the company confirms it did not cross [22].

Sources: FY2025 condensed consolidating balance sheet [23]; Note 24, Restricted Net Assets [24]. The restricted-net-assets figure is an equity measure, shown as a memo line, not additive to the two asset lines above.

Set against the ¥584.5 million already offshore, the picture is calibrated rather than alarming: the cash a shareholder is implicitly counting on is mostly out of China; the securities largely are not. The offset a bull should note is that the same offshore cash is also the pool from which the insider convertible's year-three cash put (Control and Capital) would be satisfied without any PRC friction — accessible cash is accessible to the senior claimants first.

The listing overhang

Yatsen carries the standard set of China-ADR jurisdiction risks, and they are currently dormant rather than absent. Its auditor, PricewaterhouseCoopers Zhong Tian LLP [25], is located in mainland China [26] and its audit report carries PCAOB ID 1424 [27]. Under the Holding Foreign Companies Accountable Act the company was conclusively listed as a Commission-Identified Issuer in May 2022, after the PCAOB's December 2021 finding that it could not inspect mainland audit firms; the PCAOB vacated that determination on December 15, 2022, and Yatsen does not expect to be identified again on the current annual report [28]. The trading prohibition bites only after two consecutive identifications, so the acute delisting path that was live in 2022 has been cleared — but the PCAOB re-assesses access every year, and a renewed loss of access would reopen it [29].

On the securities-regulation side, Yatsen qualifies as an already-listed "Stock Enterprise" under the CSRC's New Overseas Listing Rules that took effect in March 2023, so it is not required to file for its existing listing — but it must file with the CSRC if it undertakes refinancing, with fines of ¥1 million to ¥10 million for a missed filing [30]. That is not hypothetical: the roughly US$120 million insider convertible (Control and Capital) — RMB-denominated notes issued to a Trustar Capital vehicle and the founder — depends on Yatsen obtaining a foreign-debt registration certificate from the NDRC before its first note extends from 364 days to five years [31], so the financing already runs through the PRC cross-border-capital approval machinery. On data, the company states it is not required to undergo a Cyberspace Administration cybersecurity review, a conclusion its PRC counsel re-confirmed by consultation in February 2026 [32].

What would change this read

On the evidence, the China structure qualifies the net-cash floor without hollowing it out. The genuinely fragile element — the untested VIE contracts — governs about 3% of revenue and 11% of assets; the majority of the liquid cash is already offshore; the strictly trapped amount is a bounded ¥721.5 million of net assets plus a repatriation tax that only bites cash forced up from inside China. The offset is that the investment portfolio and a real slice of consolidated equity remain China-locked, most of the portfolio inside the VIE, and the listing risk — while dormant — is a geopolitical option that re-prices without warning.

Three things would move the read. A renewed PCAOB loss of access to mainland audit firms would restart the HFCAA clock and reintroduce a hard delisting path within two filing cycles. A PRC challenge to, or a shareholder default under, the December 2025 VIE contracts would test enforceability for the first time — though on a small revenue base. And any scenario in which Yatsen needed to pull the China-side cash or investments back offshore — to fund the cash put, a buyback, or a distribution — would surface the tax-and-controls haircut that the offshore IPO balance has so far let it avoid.