US INVESTORS appear to be on the verge of losing out on Shein’s potentially huge initial public offering (IPO), as the fast-fashion giant with Chinese roots prepares a confidential filing for a listing in London instead. Dealmakers in New York once reaped huge fees from Chinese companies going public; now they wonder whether the regulatory clouds that set in after Didi Global’s 2021 US IPO turned into a debacle will ever lift.
1. How did Shein become controversial?
Shein’s roots in China played a big role in its initial success, but in some ways they have come back to bite it. Founded in 2008, the e-commerce pioneer gained attention in 2021 as it became the most downloaded shopping app in the United States, overtaking Amazon. The company managed to more than triple its sales during the Covid-19 pandemic, to a staggering US$10 billion in 2020, making it the biggest web-only fashion brand in the world.
Its runaway success has been attributed to its prowess with data, favourable tax treatment for small packages and, more controversially, to its vast network of contract manufacturers that pump out thousands of youth-friendly styles daily at ultra-low prices. Critics and rivals have assailed the company over concerns about the environmental impact of disposable fashion, pay and working conditions for those assembling garments, anti-competitive behaviour and even evidence that some cotton in its clothing was made with forced labour.
A Bloomberg News study in 2022 found that garments shipped to the US by Shein were made with cotton from China’s Xinjiang region, where the US State Department has alleged human rights abuses against the Uyghur people, which China denies. A statement from a company spokesperson said that Shein has a zero-tolerance policy for forced labour and requires its contract manufacturers to source cotton only from approved regions.
2. How did US scrutiny affect any potential US IPO?
A potential US IPO had been a lightning rod for politicians such as US Senator Marco Rubio. The Florida Republican asked the US Securities and Exchange Commission (SEC) in a February letter to consider blocking a Shein listing, following reports that the company had approached Chinese regulators for permission. Rubio said the company needed to disclose more about its operations in China, despite having moved its headquarters to Singapore.
In April, he sent a letter to the Homeland Security Department secretary calling for an investigation into Shein and Temu, a rival e-commerce company backed by China’s PDD Holdings, for their suspected use of slave labour.
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Enter the UK, whose IPO market could use a boost – especially one the size of Shein’s, should it achieve the US$50 billion valuation seen in private trades. Bloomberg News reported on Jun 3 that the company was considering filing a draft prospectus that week. It may seek a valuation of around £50 billion (S$86 billion), the report said. Shein’s preparations do not mean an offering is imminent, said the report, which cited sources familiar with the matter, and the share sale is unlikely to start before the summer.
A Shein IPO in London is a potential subject for UK politicians as campaigns intensify in the run-up to a Jul 4 election. UK Chancellor Jeremy Hunt met with Shein in February as part of an effort by UK regulators and government officials to encourage the company to choose London, and the company has also met shadow business secretary, Jonathan Reynolds, several times this year, Bloomberg reported.
If the listing goes ahead as envisaged, it would give a huge boost to the UK’s capital market, which has been trying to rebuild its reputation as a listing venue.
3. What about other Chinese IPO plans in the US?
Executives of Chinese companies remember when things were different. Alibaba Group Holding’s US$25 billion New York listing in 2014 was the largest ever at the time, and numerous startups from the country were drawn to the large, liquid US market that did not require they turn a profit in order to go public.
The decline in relations between the US and China found its analogue in 2021, when Beijing opened a cybersecurity probe into Didi just days after its US$4.4 billion US listing, over concerns about foreigners gaining access to data with implications for national security.
The ride-hailing company’s fall, and eventual delisting, heralded a series of crackdowns on the country’s technology sector that effectively halted sizeable Chinese IPOs in the US. About a year and half later, the stance has softened, and regulators have toned down the rhetoric about curbs on overseas listings, so long as the firms meet requirements regarding the use of personal data and state secrets.
For example, Chinese regulators said in April that they would support overseas listing of tech firms and approved a US listing for an autonomous driving startup, Pony.ai.
Despite the softening stance, new Chinese IPOs remain for the most part small and rare. No single Chinese issuer raised more than US$200 million in the US last year, a far cry from 2021 when a dozen companies each raised more than that figure.
This year is looking a little better, starting with several non-conventional listings. Those have included Lotus Technology, an electric-vehicle unit of China’s Zhejiang Geely Holding Group Lotus went public in February in New York through a merger with a blank-check vehicle.
Amer Sports raised US$1.37 billion in February, but it was an outlier – even though the maker of Wilson tennis rackets, Salomon ski boots and Arc’teryx outdoor gear is majority-owned by a Chinese-led consortium, its roots and much of its current operations are focused in Europe and the US, making it less sensitive from a regulatory perspective.
In May, Zeekr Intelligent Technology Holding, the high-end electric car brand under Geekly, raised US$441 million, marking the biggest US listing by a China-based company since 2021.
4. Will things go back to how they were any time soon?
That’s unlikely, considering all the tension even for companies that are not receiving scrutiny from members of the US Congress.
The SEC has expressed concerns about the quality of Chinese firms’ risk disclosures and continues to demand more of those to protect investors. New guidance on the issue was released last July. At the same time, Chinese companies are coming under pressure from domestic regulators about so-called “risk factors” warning language in their US IPO prospectuses.
As part of new overseas listing rules introduced in 2021, Beijing prohibits investment banks from including comments that misrepresent or disparage China’s laws and policies, or the business environment and judicial situation of the state, the Financial Times reported in January.
If US and Chinese regulators cannot find a characterisation of the risks of investing in Chinese companies that they can agree on, there’s little chance of the once-mighty China-to-US IPO pipeline reopening.
5. What were Shein’s other options?
Shein and other companies caught in the China-US tussle – including ByteDance, whose TikTok app faces a ban in the US unless it’s sold to a non-Chinese company – have options. None of those options is quite as appealing as a spot on the New York Stock Exchange or Nasdaq.
Hong Kong would make a better alternative for Shein than London, some investors say, given comparable Chinese peers with huge e-commerce footprints such as Alibaba and Tencent Holdings. However, Shein has been trying to play down its China connection, and a Hong Kong listing would be counter to that goal.
If a London listing does not pan out, the company could turn to Singapore, whose IPO market is in even worse shape than London’s. Any venue shift would require Shein to submit a new application with Chinese regulators, who would ask for additional materials and clarifications. BLOOMBERG
