The Chinese fast-fashion company Shein is facing mounting troubles ahead of its planned initial public offering, raising questions about when the deal might happen and whether the stock can achieve its desired valuation.
The company confidentially filed to go public in the U.S. in November, according to multiple media reports. Two months later, the Securities and Exchange Commission had yet to respond in writing, The Wall Street Journal reported this month, citing people familiar with the matter. Replies typically come within 30 days, it said.
Many issues could have contributed to the delay. Both Washington and Beijing have concerns over how Shein handles customers’ data. U.S. lawmakers have accused the firm and its third-party suppliers of using forced labor. And the company is also juggling multiple lawsuits from rivals alleging copyright infringement and anticompetitive practices.
The SEC will likely ask Shein to make detailed disclosures regarding the regulatory concerns and lawsuits, said Derek Yan, senior investment strategist at KraneShares, a China-focused investment manager. Those risks could harm the company’s valuation and investors’ appetite for its shares, he said.
“The data security issue will probably delay the IPO, because [Shein] would need some time to deliver what the regulators potentially will ask for,” said Yan.
A SEC spokesperson said the agency doesn’t comment on individual entities’ filings. Shein had no comment on the IPO.
“They’re going to be given a very difficult time by the SEC before they actually go public here,” said Alan Wink, managing director at Eisner Advisory, which helps clients with accounting issues, taxes, mergers and acquisitions, and IPOs. “It’s going to take a while.”
A Big Deal
Founded by a group of Chinese entrepreneurs in 2008, Shein has made major inroads into the global fast-fashion market thanks to its ultralow prices. The online retailer sells cheap clothing, mostly made in China, in more than 150 countries. The U.S. is its largest market.
Growth has been meteoric. Revenue reached a reported $24 billion in the first nine months of 2023. That is significantly more than
H&M’s
$16.4 billion sales from December 2022 to August 2023 and isn’t too far from Zara parent
Inditex’s
$27.7 billion from February to October 2023.
The potential for further growth has given the company a much higher price tag than rivals. Valued at $66 billion in the latest round of funding, Shein is now the fifth-most highly valued private company in the world, according to Crunchbase. TikTok’s parent ByteDance and Elon Musk’s rocket company SpaceX are some of the few that rank ahead of it.
Bloomberg reported in November that Shein is hoping for a valuation of as much as $90 billion for its IPO, according to people familiar with the matter.
Accumulating Troubles
As the U.S.-China relationship has deteriorated in recent years, both Washington and Beijing have increased their scrutiny of Chinese companies trying to do business or raise capital in the U.S. While ByteDance came under the spotlight last year, Shein’s IPO plans are putting it in focus this year.
The company has faced allegations that the clothes it sells include cotton from China’s Xinjiang province, where forced labor of Muslim Uyghurs has been used. A 2022 U.S. law largely bans the import of goods with links to the region.
Last year, a group of U.S. lawmakers, led by Reps. Jennifer Wexton, a Democrat, and John Rose, a Republican, urged the SEC to halt Shein’s IPO until the company shows sufficient transparency about its supply chain.
Shein said it has a zero-tolerance policy for forced labor and requires its contract manufacturers to only source cotton from approved regions to comply with U.S. law.
Data security is another big concern. In December, Rep. Cathy McMorris Rodgers, chair of the House Committee on Energy and Commerce, asked Shein to share more information on its collection of user data in the U.S. and its communications with the Chinese Communist Party. Chinese-owned e-commerce marketplaces are “a serious risk” for consumer safety and data privacy, the lawmaker said.
Beijing has been tightening its scrutiny on Chinese companies planning to go public overseas as well. Last year, the government rolled out rules that require firms to submit to it their listing documents and obtain formal approval from Chinese regulators in compliance with national security and data-protection laws.
The Journal reported last week that the Cyberspace Administration of China is looking into whether Shein could protect the data it collects in China from leaking overseas and what it might disclose to American securities regulators due to the listing.
Although Chinese regulators couldn’t directly stop an overseas IPO, running afoul of Beijing is probably a bad idea. In 2021, the Chinese ride-hailing company DiDi went ahead with a U.S. listing even as Chinese authorities asked it to delay the deal. Days after the listing, Beijing launched a probe into Didi’s data practices, blocked it from accepting new users, and took some of its apps offline.
Didi’s shares tanked and the company delisted from the New York Stock Exchange in less than a year.
“Chinese” Company?
Shein is doubtless well aware of, and prepared for, the political risks, said KraneShares’ Yan. A few years ago, the company moved its headquarters to Singapore to distance itself from its Chinese roots. But that doesn’t seem to have changed how regulators on both sides view it.
According to Beijing’s new guidelines on offshore listings, a company can be subject to the rules if most of its business activities are conducted in mainland China, or if senior managers are mostly Chinese citizens. That is so even if it is based offshore and generates revenue overseas.
Reuters reported earlier this month that Shein is seeking Beijing’s approval before it goes public in the U.S.
In a letter sent to Shein last month, McMorris Rodgers raised the concern that Chinese laws could allow Communist Party officials to access Chinese firms’ user data. “Past violations by TikTok, and other Chinese-owned applications, to protect user data, and China’s record of accessing Americans’ information, undercuts any claim of data security,” the letter said.
“A lot of the issues around the company would be identical whether they’re based in Singapore, China, or the United States,” said Eisner Advisory’s Wink.
Write to Evie Liu at evie.liu@barrons.com
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