Shein's IPO setback is the least of its problems

Reuters

3 days ago

LONDON, May 28 (Reuters Breakingviews) - Finding a listing venue for a vast retailer with double-digit percentage revenue growth might sound easy in theory. But fast-fashion group Shein is finding otherwise. On Wednesday, Reuters reported that the company may switch to a Hong Kong float rather than London, after failing to secure a green light so far for the UK plan from the China Securities Regulatory Commission. A bigger question is whether growing hostility to the business in the United States and Europe requires a tough geographic shift.
Hong Kong was not Donald Tang's first choice for an IPO venue. The executive chairman of Shein had initially sought to list the business in New York in 2022 but faced a backlash from lawmakers like Marco Rubio, who is now secretary of state and who has criticised, opens new tab the group's labour practices. Shein has said it has a zero-tolerance policy over forced labour and child labour in its supply chain. Now, the London plan seems doomed after an apparent lack of support among Chinese regulators, according to Reuters. Shein declined to comment.
Hong Kong's IPO market may be warming up from a low level, but in many ways that's beside the point for investors. The bigger concern is that Europe and the U.S., two of its biggest markets, are introducing restrictions that will erode the company's competitiveness, which has historically rested on selling clothes like dresses for less than $20 to bargain-hunting Westerners. Take Washington, which has moved to end the historic practice of granting duty-free access to sub-$800 items. Last week, Europe followed suit and announced a plan to apply a 2-euro flat fee on low-value e-commerce packages entering the bloc.
These two changes will put pressure on Shein's already dwindling financials, and therefore its valuation. In February, opens new tab, the Financial Times reported that Shein's net profit in 2024 declined by almost 40% year-on-year to $1 billion despite a 19% rise in revenue. The fall in earnings was the result of increased competition from rival Temu, owned by China's PDD (PDD.O), opens new tab, according to the report, which also stated that some stakeholders had pressured the group to cut its sought-after IPO valuation to around $30 billion compared with a peak of $100 billion.
Amid this pressure, Tang may need to embark on a tricky pivot. He could try to find other ways to keep Western customers, for example by setting up shop locally, but that would erode his cost advantage. Another option would be to shift away from the West and focus on countries like Saudi Arabia, where online retailers have made rapid inroads. Shein could also focus more on China or other large Asian markets. The issue, however, is that local prices are generally lower than in the United States and Europe, raising the question of whether the company would have an edge. In any case, the question of where Shein floats is probably not the main problem for investors.
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