🔒 Britain shouldn’t want a Shein hand-me-down: Andrea Felsted

With London struggling to compete with New York for IPOs, UK authorities are eager to attract online retailer Shein. However, investors should be wary. Despite Shein’s rapid growth, environmental concerns, a complex Chinese supply chain, and potential regulatory issues pose significant risks. Valuing Shein on par with industry giant Inditex SA seems premature. Any ambitious valuation will need to address these substantial challenges head-on.

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By Andrea Felsted

With London increasingly losing out to New York when it comes to initial public offerings and primary listings, it’s little wonder that British authorities are so keen to woo online retailer Shein. ___STEADY_PAYWALL___

But the UK shouldn’t be accepting the US’s sloppy seconds. If Shein does list in the UK, investors face a raft of risks, from the environmental impact of its ultra-fast fashion to concerns about its sprawling Chinese supply base.

Consequently, any suggestion that Shein is the next Inditex SA, and should therefore be valued at around £50 billion ($64 billion), appears as flimsy as one of its £10 summer dresses.

Shein originally sought to list in New York but ran into political and regulatory hurdles. Executive Chairman Donald Tang then turned his attention to a London listing.

The UK might need a blockbuster IPO, but investors should be cautious. Shein is headquartered in Singapore, but the ultimate controlling party is Elite Depot Ltd., a Cayman Islands registered entity.

So what exactly are fund managers being asked to buy a share in? An overseas e-commerce platform that reacts to the looks on social media in real time and is supplied by a network of 5,000 Chinese factories, none of which it owns. The company is expanding its manufacturing outside of China to regions such as Brazil, Mexico and Turkey. However, the bulk of suppliers remains in China.

This supply chain is a long way from its end markets — and investors. That amplifies the environmental, social and governance risks in a sector already under intense scrutiny on labor conditions. Shein will have to work hard to convince potential IPO buyers that the perils of this fragmented footprint aren’t greater than at any other retailer for whom sourcing from Asia will account for the majority of their garments.

Shein has become vocal in defending its business. It says it pays a competitive rate to its suppliers, so they can pay fair wages to employees. And it is investing $70 million over the next five years into the factories it uses.

On the issue of cotton produced by the Uyghur minority in China’s Xinjiang region, the company says that it has “a zero tolerance policy for forced labor” and requires its manufacturers to only use cotton from approved regions.

Last year, Shein audited contracted manufacturers representing about 95% of its namesake branded products. Some 28 suppliers, a small number out of the 5,000 Shein uses, were ditched after they failed to meet its standards, including not meeting the requirement to employ a minimum of 50 workers in at least 800 square meters (8,611 square feet) of factory floor space.

Then there are the environmental aspects. The company’s even faster fast fashion seems at odds with the increased appetite across the industry and among consumers to make clothing more sustainable.

Shein argues that its approach — initially producing 100 to 200 pieces — and only making more if they prove popular helps to cut waste. Unsold inventory is in the low-single-digit percentage, compared with about 20% for the retail industry. The e-commerce company is also investing in more sustainable businesses, such as a resale platform. But Shein customer hauls on TikTok show that its cheap prices do encourage consumption.

There are also questions about Shein’s vulnerability to changes in the tax regime. The company ships directly to Western countries from China in smaller package sizes, instead of moving stock in bulk to fulfillment centers and then distributing parcels — the way most retailers operate. This prevents it having to pay import duties, as shipments worth less than £135 avoid tax. Shein says it pays all applicable levies and that its business model — not favorable treatment — enables it to offer low prices to consumers. But rival retailers are calling for a clampdown on what they describe as a loophole.

Finally, there is the danger of Shein simply falling out of fashion. It already faces competition from Chinese rival Temu, owned by PDD Holdings Inc. A salutary lesson also comes from Wish, a once fast-growing discount marketplace that combined bargain hunting with wheel-of-fortune-style games. Parent ContextLogic Inc. had a $14 billion valuation when it floated in 2020, but Wish was sold for just $173 million earlier this year.

Given Shein’s growth — net income was more than $2 billion in 2023, up from $700 million in 2022 and $1.1 billion in 2021, according to the Financial Times — it will likely be seeking to come to market as the new Inditex.

Indeed, assuming the mooted valuation is for Shein’s equity, and it adds about another about $1 billion in net income this year, it would have a 20-plus price-to-earnings ratio, roughly comparable to Inditex’s.

True, Shein is growing faster. The e-commerce business aims to increase revenue to almost $60 billion in 2025 from $22.7 billion in 2022, according to the FT, which would put it ahead of Inditex. But given the uncertainties, it should be valued at a substantial discount to the Spanish giant. Inditex has a long track record. It uses mostly third-party factories too, but the majority are close to its headquarters in northern Spain, including in Portugal, Turkey and Morocco.

No supply chain is risk-free, but Inditex’s proximity-sourcing makes the perils more manageable. And Inditex is no slouch when it comes to growth either. It is expanding flagship brand Zara and quiet luxury favorite Massimo Dutti in the US, giving it plenty of runway still.

The fact is there aren’t many companies that look exactly like Shein. That makes it difficult to find a direct comparable for the purposes of valuation. But what’s clear is that any rating even approaching Inditex’s will have to be earned.

Tang has said he welcomes the greater scrutiny that an IPO would bring. With a punchy valuation and an extensive list of potential pitfalls, he may just get his wish.

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