The City of London has begun to stir with excitement once more as the prospect of Shein, the Chinese fast fashion giant, potentially listing on the London Stock Exchange bolsters hopes that the UK can regain its standing among the global financial capitals after a series of disappointments.
The Singapore-domiciled company originally sought a float on the New York Stock Exchange but this faltered because of growing tensions between the US and China. Shein has now turned its gaze to London, potentially ending the LSE's IPO drought and bringing a $60 billion plus stock to the FTSE.
David Swartz, senior equity analyst at Morningstar, believes that the New York Stock Exchange would want Shein to list because of the sheer size of the company, with estimates that Shein is worth $66 billion, according to Pitchbook Data as at May 2023¹.
However, geopolitical tensions have been just too hard to overcome.
“There is just a huge amount of animosity between the US and China recently on trade,” he says.
Shein's ESG Risks on Labour and Governance
Swartz also points to controversy around Shein’s use of cotton from the Xinjiang region of China, where the Chinese government are reportedly forcing the Muslim minority Uyghur population to work in labour camps.
“There’s also issues with the way that Shein gets around tariffs. So, in the US shipments below $800 are not subject to them. And so, this allows Shein to get around the rule because they ship directly to the American consumer," he adds.
“But Shein would be a large IPO in the apparel industry. There aren’t that many apparel companies in the world with valuations that large. Yet Shein, is really stuck in the middle of greater geopolitical forces.”
Dan Coatsworth, investment analyst at AJ Bell, picks up on the ESG risks associated with the float.
“The key negative is that Shein comes with more baggage than a celebrity takes on holiday. Questions continue to be asked about its corporate governance standards, working conditions, supply chain and accusations of intellectual property theft.
The float is likely to provoke mixed feelings on the exchange, and probably in the UK government, which has recently tightened up rules on foreign companies in sensitive states like China listing in London. China telecoms firm Huawei has been banned from the UK's 5G network, for example.
"Shein wants to be seen as a global player and not simply a Chinese firm flogging cheap togs overseas. It will have to do things the right way and become a good corporate citizen to support this ambition, so it’s on a learning journey. London Stock Exchange will publicly welcome the company with open arms but behind closed doors it will no doubt be hoping Shein has no skeletons in its closet," Coatsworth adds.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, agrees on the ethical concerns the IPO would trigger:
"While this would be a boost for the City, it is likely to present deep ethical issues for investors to navigate. Shein has come under significant criticism for the huge volumes of cheap clothes it produces, the lack of transparency in its supply chain and its appropriation of other designers’ work. Given these concerns, there may well be wariness among investors who put ESG in their priority list, if the firm does list in London."
A Note on Shein's Valuation and the FTSE
PitchBook, a Morningstar company, valued Shein at $66 billion (£52 billion) in May 2023. Awkwardly, that would make the company the 12th biggest company in the FTSE 100, above the London Stock Exchange itself. But this is conjecture at the moment, because we don't have the prospectus. Here are some considerations:
• A lot depends on the "free float", how many shares are available to buy at IPO. Arm Holdings' free float is just 10% of the company
• FTSE Russell rehuffles its indices every quarter, including the FTSE 100, so the next window is likely to be September for a promotion
• Will Shein opt for a premium listing, which has higher regulatory hurdles, or a standard listing?
• The company's value could be even higher than in 2023, especially if there is hype around the float
LSE Needs a Win Against New York
A flotation of Shein’s size would be welcome because it has lost ground to its larger and more liquid counterparts, the NYSE and the Nasdaq.
London was rejected by Cambridge-based chip designer Arm Holdings, which sought a higher valuation on the Nasdaq - and has since prospered, with shares up nearly 60% so far this year.
Betting firm Flutter has just ditched its primary London listing in favour of New York, and the cyber security giant Darktrace which floated in London 2021, has accepted a US private equity bid. BHP’s takeover plans for Anglo American could see the London-listed miner leave the FTSE 100, although the demerger could see diamond maker De Beers floated on the LSE.
Looking at London's recent high-profile IPOs, investors may be cautious: Deliveroo (ROO) has a long way to go before it reaches its lofty IPO price, and Darktrace shares were volatile before the company was bought. Currency and transfer specialist Wise (WISE) was London's biggest tech float in 2021, but shares are still just below their float price of 800p. The stock is worth £8 billion at current prices, so Shein's value around £50 billion would dwarf that.
“Obviously it is quite good for the London market regardless of what you think about fast fashion, it is a giant company, and it could be one of the largest stocks if it's on the FTSE 100,” Kathleen Brooks, research director at XTB UK says.
“We have had some other delistings, so it is always good to get somebody on and to have that flow coming in. But we cannot forget that they are having quite some outflow.”
For Chris Beauchamp, chief market analyst UK and head of market analysis at IG Group, the news shows that Britain is still open to business, and that companies can get liquidity outside of the island of Manhattan.
“It certainly helps to diversify the index. We talk about the FTSE 100 as being banks and miners. So, it would just help to diversify the index a bit more and to get something of what I might call the new economy into it rather than an index mostly dominated by old fashioned stocks.”
“It adds a bit more and certainly a bit more glamour to the London stock market.”
Shein Leadership Keeping a Low Profile
XTB's Brooks points out that Shein is following a trend of larger Chinese companies listing outside of China, due to uncertainty over the Asian giant’s political and economic direction.
She also notes that the fast fashion brand’s leadership are taking a more reserved approach, moving away from becoming larger-than-life figures like Jack Ma, cofounder of the Alibaba Group, who was subsequently caught up in China’s regulatory crackdown on technology giants in 2020 and 2021 and disappeared for a month. The flotation of Ant Group, spun out of Alibaba, was pulled after the Chinese government intervened in 2020.
“They are not commenting, we have not seen any big interviews. There does not seem to be any one person behind it, and I think that is to avoid scrutiny from Beijing.”
Although tensions between the US and China have impacted Shein’s plans to list in New York, Brooks believes it will not be affected by President Joe Biden’s recent tariffs package against China.
“US officials now seem very focused on technology and EVs not clothing. Now is probably a good time for them to list before they could be targeted,” she says.
¹ PitchBook valuation for Shein is at May 2023 when two large firms last invented; one was Abu Dhabi's sovereign wealth fund and the other was famed VC firm Sequoia Capital. PitchBook rates the chance of Shein's IPO success as 98%.
