I'm okay with the character models. The warm color palette looks quite magical and if they get the music and atmosphere right, it should draw you right in. My main concern was that some of the characters looked like they could be much better using the same technology they are using but a lack of skill and/or effort have left them looking a little questionable.
Lan Di for example, when they first showed him he did not look anything like the Dreamcast model and the problem with that was, he never had that cold, menacing look. The new model looks better but still light years away from the Dreamcast version. Lan Di is a cold, heartless, skilled murderer and you get that all from his original Dreamcast model without him even speaking a word.
On top of this and art style aside, the main character models in the Dreamcast games look better than Shenmue 3 despite the game being released 20 years ago.