Shein margin wobble takes bite out of IPO value
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Nov 14 (Reuters Breakingviews) -Shein’s planned stock-market float has always seemed dicey. The Singapore-headquartered fast-fashion group, which has Chinese roots, is exposed to rising Sino-U.S. tensions and environmental scrutiny. But a Donald Trump U.S. presidency and poor first-half results pose more pressing problems. To hit its most recent $66 billion private valuation, the company faces the tricky task of convincing investors that its issues are temporary.
The group founded by Chinese entrepreneur Chris Xu, and whose public face is Executive Chairman Donald Tang, is sticking with its plan for a London initial public offering. Tang has in recent weeks held meetings with investors, a person familiar with the matter told Breakingviews. The company also added UBS UBSG.S and Barclays BARC.L to the roster of banks working on its float, according to a Bloomberg report citing people familiar the matter, joining Goldman Sachs GS.N, JPMorgan JPM.N and Morgan Stanley MS.N.
Tang and his bankers have a tough job on their hands. Valuing Shein is tricky, partly because of the range of listed possible comparable companies. Many large clothing groups trade at around 10 times 2026 forecast earnings, using Visible Alpha data, including Primark owner Associated British Foods ABF.L and Gap GAP.N. Fashion titan Inditex ITX.MC, the $170 billion group known for its Zara stores, is worth 22 times consensus net income in two years’ time. That’s roughly halfway between online specialists Zalando ZALG.DE and Amazon.com AMZN.O. Finally, JPMorgan analysts until recently used a multiple of 15 times forecast 2027 earnings to value Temu, a Shein rival that’s part of China’s PDD PDD.O.
Nor is it easy to forecast the company’s earnings, especially now that Shein’s business seems to be misfiring. The Information reported last month, citing two people familiar with the matter, that year-on-year sales growth during the first six months of 2024 tumbled to 23%. That’s almost half the 40% pace of increase in 2023. And the net margin disappeared. Earnings in the first half fell 70% to $400 million, on $18 billion of revenue. The implication is that just 2% of revenue made its way to the bottom line, compared with 8% last year. Tang has already rushed to reassure Shein’s backers that the profit decline was a blip. In a letter to investors sent last week, the executive chairman said the net margin had risen again in the most recent quarter to 8%, according to a person familiar with the matter.
The question is whether possible IPO investors will treat the recent margin wobble as temporary or a sign of lasting problems. It makes a big difference to the valuation. On the optimistic view, Shein’s revenue could keep growing at 23% on an annual basis from last year’s $32 billion, implying 2026 sales of about $60 billion. Using the rosy 8% net margin and applying Zalando’s 18.5 multiple of earnings in two years’ time, the implied equity value would be a juicy $89 billion.
But if profitability shrinks again, the valuation tumbles. A 2% margin implies just a $22 billion price tag, for example. Splitting the difference and using, say, a 4% margin implies a $44 billion mark, which is still a third less than the level Shein raised money at in a 2023 private funding round.
Investors have reasons to take the pessimistic view. Lawmakers in key markets like Europe and the United States are ramping up their scrutiny of the retailer and considering introducing tough new rules that could make Tang and Shein’s life even harder. In mid-September, outgoing U.S. President Joe Biden urged Congress to act against the “abuse” of the so-called “de minimis exemption”, which allows tariff-free imports for products with a retail value of $800 or less. The White House said that the number of shipments claiming this exemption each year has increased from 140 million to over 1 billion over the past decade. A Congressional report in 2023 concluded that Shein and Temu are jointly responsible for over 30% of packages that enter the United States under the de minimis provision each day.
The end of tariff-free access to the United States would force Shein to raise prices, denting its competitiveness, or invest more heavily in reorganising its supply chains, adding extra cost. Things could be even worse under the administration of President-elect Trump, a well-known China hawk who has floated the idea of extra levies on goods from the People’s Republic. Meanwhile, the European Commission is considering applying extra duties to cheap products shipped from China, the Financial Times reported in July.
Governance is another problem for the IPO. Shein hasn’t yet disclosed a conventional board with independent directors, and its founder Xu keeps an unusually low profile. The lack of transparency is hardly helping with the company’s controversial image. A UK human rights group in June launched a campaign to stop the IPO, citing concerns about labour practices. Shein said it had a zero-tolerance policy for forced labour and was committed to respecting human rights. Environmentally conscious investors will have questions of their own, meanwhile, including how sustainable it is to send $5 disposable tops halfway across the world.
Finally, the China Securities Regulatory Commission (CSRC) is another potential problem. The watchdog previously said it would not recommend a U.S. IPO, Reuters reported. It’s unclear what the CSRC thinks about the London plan.
All of those issues might be bearable if Shein was still growing at 40% and converting those sales into earnings at a consistent margin. Investors have a habit of holding their noses and buying in those circumstances, rather than risk missing out on a promising opportunity. Right now, however, Tang and Shein are offering an unpalatable mix of questionable governance and unreliable financial performance. That means Tang's only chance of making an IPO work will be to mimic the company’s attitude to its clothing: apply a knock-down price.
Follow @aimeedonnellan on X
CONTEXT NEWS
Shein’s net margin recovered to 8% in the third quarter of 2024, according to a person familiar with the matter, compared with 2% in the first half of the year. Executive Chairman Donald Tang wrote a letter to investors assuring that the dip in profitability was temporary, the same person told Breakingviews.
Online retailer Shein's revenue growth slowed to 23% in the first half of 2024, from 40% last year, The Information reported on Oct. 22, citing two people familiar with the matter. The net margin was 2%, compared with 8% a year earlier.
Listed retailers' varying 2026 price-earnings multiples https://reut.rs/4fc7CtN
Shein's volatile private valuation https://reut.rs/40DrzVU
Editing by Liam Proud and Streisand Neto
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