Shein IPO: why has the ultra-fast fashion leader accepted a 75 percent discount?

The traditional gong of the Hong Kong Stock Exchange sounded this Tuesday morning for a company that would have undoubtedly preferred a different tune.

Shein debuted with a valuation of approximately 26.5 billion dollars, before its stock fell by almost 10 percent within the first few hours of trading. In 2022, private investors had valued the fast fashion giant at nearly 100 billion dollars. The group has lost three-quarters of its value in just four years.

Why accept such a discount and not wait for better days? Why pursue an IPO at any cost, following successive rejections from New York and London? The question goes beyond simple financial arbitration. Shein is looking to raise 1.7 billion dollars, primarily to strengthen its technology and international expansion.

This is not just a story about valuation. It is the price to pay to finance the next chapter, at the precise moment when the strategies that made Shein successful are reaching their limits and its competitive advantages are eroding.

Waiting would not necessarily have improved its case

If a company believes its valuation is too low, why not wait two or three years, improve its results and return to investors with a stronger case?

Shein is no longer the company that private investors valued at 100 billion dollars. In 2022, the market was paying for a growth story. E-commerce was emerging from the pandemic, capital was flowing into technology companies and Shein was demonstrating impressive expansion.

Today, investors must consider a different equation. Growth is slowing and margins are under pressure. The US has eliminated the customs exemption that benefited small parcels. Europe is also tightening its controls and taxation. Competition from Temu and other platforms has intensified. Western authorities are scrutinising Shein's model much more closely. Reuters reports ongoing investigations by the European Commission and the US Federal Trade Commission, following several penalties in France and Italy.

The first quarter of 2024 already provided a glimpse of the problem. Shein recorded a net loss of 99 million dollars, largely due to the removal of the favourable US customs regime for small parcels and an accounting charge of 328 million dollars.

In other words, waiting would not have guaranteed an improvement. It could have meant allowing the market to gradually revalue the company downwards without even benefiting from the capital of a listing.

Shein is not just selling shares. It is buying time

An IPO does not just serve to display a market value. It provides capital, offers liquidity to existing shareholders, creates a currency for future transactions and imposes new financial discipline. In Shein's case, the capital raised is primarily intended to finance the next stage of its model.

Reuters indicates that approximately 80 percent of the funds raised will be allocated to technology, brand development and international expansion.

Shein is therefore not raising 1.7 billion dollars to celebrate its past. It is raising money to fund the transformation of a model that is encountering its first large-scale limitations.

The company must invest in its technology, strengthen its international presence and continue to develop its operational infrastructure. It must also contend with commercial and customs costs that did not exist at the same level when its model first took off.

The stock market therefore provides it with a resource that the private market no longer guarantees as easily: capital, but also a platform.

An IPO can be successful even if the stock price falls

The fact that the stock price falls after its debut does not mean that Shein failed to raise the desired funds.

The company sold approximately 280 million shares at 48.56 Hong Kong dollars, for gross proceeds of 13.6 billion Hong Kong dollars, or about 1.74 billion dollars. The net amount is lower after transaction-related fees. Demand was not non-existent. The tranche for the Hong Kong public was 5.63 times oversubscribed and the international tranche was 2.59 times oversubscribed.

Shein did not, therefore, fail its IPO in a technical sense. It successfully sold the planned shares and brought in capital. It was the secondary market investors who subsequently decided that these shares were worth less than their issue price. This is precisely the difference between raising money and being well-valued.

Shein secured its 1.74 billion dollars. The buyers who received the shares on the primary market, however, then resold them at a lower price. The market's penalty therefore primarily relates to the perception of the company's future value, not the money already raised by the company.

Not all shares sold necessarily finance Shein

An IPO can include new shares, which provide capital to the company, and shares sold by existing shareholders, allowing them to recover part of their investment. In Shein's case, the structure of the deal must be read carefully. The transaction involves approximately 280 million Class B shares and an over-allotment option. The listing documents also show the presence of many long-standing investors among the shareholders and cornerstone investors.

This means the IPO serves two functions simultaneously. It provides financing for the group and it also begins to offer liquidity to certain investors who came in before the listing. This is particularly important for a company that has raised private capital at valuations much higher than today's.

A public valuation of 26.5 billion dollars certainly allows Shein to raise capital. It also allows for the gradual transformation of a portion of private capital, which had become illiquid, into listed securities.

The price paid by the market is now known to all. This is where the discount becomes painful.

The problem is not losing 75 percent of its value. It is what the remaining 25 percent still implies

The formula from Reuters Breakingviews is particularly interesting to note. A few minutes after opening, Shein's value had already fallen by about 10 percent, to around 26.3 billion dollars. According to Reuters, even this valuation still implies rather optimistic assumptions about revenue growth and margin improvement. The analysis even suggests that a value closer to 15 billion dollars might be more realistic.

This is the real slap in the face of the day. The markets are not simply purging the excesses of 2022. They are asking a much more unsettling question for the future: what if 26 billion dollars is still an overvaluation for a group whose growth is collapsing? At 100 billion dollars, investors were buying into limitless hyper-growth. At 26 billion dollars, they are valuing a conventional retailer, caught up by soaring operational costs and the grip of regulators.

Charu Chanana, chief strategist at Saxo, summarises the problem in comments reported by Reuters and picked up by Boursorama. Even after the huge valuation correction, investors do not necessarily consider Shein to be cheap. Compared to PDD, Temu's parent company, the market would pay more for Shein despite less visibility on its growth and significant regulatory and commercial risks.

Shein enters the market as its historical advantage comes under attack

For years, Shein established itself through a formidably efficient mechanism, driven by an algorithm capable of capturing the slightest emerging trend on social media. Where traditional fast fashion took several weeks to copy a style or a design, Shein introduced thousands of new items daily. These were produced in tiny batches, tested in real-time on smartphone screens and then restocked at a frantic pace. It was a logistical operation of almost unparalleled precision, where data eliminated stock risk and stifled competition on price.

This magic trick was not just down to the genius of its engineers. It relied on a finely tuned customs and tax environment. Millions of small packages slipped under customs radar thanks to tax exemptions, cheap air fuel and consumers willing to overlook the origin of products for a few dollars. That fuel has now run out.

In the US, the end of the de minimis rule has directly attacked the economics of small parcels. In Europe, customs rules are also changing. In France, September 1 marks the entry into force of the first level of the penalty targeting ultra-fast fashion. This penalty is set to increase progressively to 19.50 euros per product by 2030, capped at 50 percent of the pre-tax price. Reuters points out that this measure comes into effect on the very day of Shein's stock market debut.

The day Shein becomes a listed company, its main playing field also becomes more expensive to operate in.

The IPO's timing therefore tells a different story than one of financial urgency

However, this should not be seen as an emergency financial operation. Shein is not in dire straits. The case has other elements to consider.

The company still has considerable size, a global consumer base and a history of significant cash generation. What has changed is the quality of growth that the market is willing to pay for.

Reuters reports that Shein anticipated revenue growth in the first half of 2024 to be close to that of the first quarter, at only 1.1 percent, with a slight contraction in operating margin expected. For a company once valued as one of the fastest-growing in global e-commerce, the contrast is stark.

The private market could still postpone the confrontation with this new reality. The stock market, however, makes it a daily occurrence. Every quarter, Shein will now have to show that its technological investments yield more than just expenses. It must prove that its price increases do not destroy too much demand, that its new markets compensate for the difficulties in the US and Europe, and that its model can survive the gradual disappearance of the advantages that fuelled its explosion.

Why Hong Kong rather than New York or London?

Shein tried for several years to list in New York and then London. These plans were hampered by regulatory and political questions surrounding the company and its ties to China. Reuters reports that Chinese authorities ultimately blocked the Western moves and that Shein had to move closer to Beijing to get the green light for a Hong Kong listing.

Hong Kong therefore became the possible compromise between Shein's international ambition and the reality of its Chinese origins. The listing allows the company to maintain an international dimension while entering a capital market that is much more compatible with its current regulatory and political environment.

The discount is therefore less a failure than a change in status

Shein is coming to the stock market as a different company from the one that attracted investors in 2022.

It is no longer a young e-commerce company with the promise of explosive growth, valued primarily on its prospects.

It must now convince investors as a major global distributor. This means demonstrating margins, defending market share, absorbing customs duties, financing technology, paying for compliance, managing its reputation and proving that growth can become strong enough again to justify a higher valuation.

The Hong Kong Stock Exchange has not closed its doors to Shein. It has simply presented it with the bill for its new status. The initial trading suggests that 26.5 billion dollars is not a clear floor.

Shein has certainly obtained what an IPO is primarily meant to provide: capital. It has simultaneously lost something that no stock market listing can easily recover: the benefit of the doubt granted by private markets.

At nearly 100 billion dollars, Shein had to convince investors it could become much bigger. At 26 billion dollars, it must now convince them it can become much more profitable.