Shein IPO headed for Hong Kong?

The fast fashion sensation’s plan for a London listing may be coming unglued, after it abandoned a New York IPO plan for similar politically motivated reasons

Key Takeaways:

  • Shein may end up listing in Hong Kong, after its New York IPO plan collapsed and its latest London plan faces similar geopolitical pressures
  • The case shows how blockbuster IPOs by Chinese firms are becoming more difficult in New York, though some major listings may still succeed

  

By Doug Young

Are blockbuster listings by Chinese firms in New York destined for extinction?

It certainly looks that way lately, based on the latest developments in the IPO by fast fashion sensation Shein, whose multibillion-dollar listing is quickly becoming a pariah on major global stock markets. The company made confidential filings for a U.S. IPO late last year, only to abandon the plan over a combination of geopolitical and legal issues we’ll describe shortly.

Its New York detour led it to London, where it reportedly made similar filings last month, according to media reports. But that listing is now also coming under pressure for similar reasons that killed its New York plan. As a backup, the company is keeping its options open by leaving the door open for an IPO in Hong Kong, where such factors would have little or no impact, according to a report in the Financial Times last week.

In some ways, Shein’s case reflects the minefield of obstacles major Chinese firms are facing these days in trying to list overseas. Some of those are the result of political factors, such as scrutiny of issues related to human rights and intellectual property theft that have caught the attention of Western politicians in Shein’s case. But other factors are coming from China, most notably a data security law that will make it difficult for any major company with large amounts of China-based data to list in New York, London or any other Western market.

In Shein’s case, the Western political factors were largely responsible for killing the New York IPO, and now look set to do the same in London. Data security seems to be less important in this case, since Shein makes most of its money by selling cheap, China-produced clothing to consumers outside China, including in the U.S., where it is the market leader.

The company has risen rapidly since its founding in 2012 to become the world’s largest fast fashion retailer, with estimated revenue of $22.7 billion in 2022, up 45% from $15.7 billion the previous year, according to statistics-tracking website Statista. It sells to consumers in more than 150 markets worldwide, with the U.S. as the largest.

The company’s valuation crested at about $100 billion in 2022 but has been moving steadily downward since then, and stood at about $66 billion at the time of a fundraising about a year ago. Still, most major stock markets would be clamoring to host such a listing, which could easily become one of the world’s largest in any given year, raising $10 billion or more.

U.S. stock exchanges were eager to host the listing until politicians reportedly intervened and applied pressure through the U.S. securities regulator. They were concerned over some of Shein’s labor practices, and also over accusations of intellectual property (IP) theft against the company – two areas where Chinese firms are often vulnerable. Human rights group Amensty International has been leading the charge to kill Shein’s London IPO plan, saying such a listing would represent a “badge of shame” for the London Stock Exchange.

Hong Kong migration

Shein’s case, and the latest report that it might still consider Hong Kong, underscores the recent rise of the former British colony as one of the last friendly offshore listing grounds for Chinese IPOs. The city is the only one in China whose stock market is dominated by international investors, which owes to its colonial past. Nearly all big global fund houses and investment banks have major offices there.

Hong Kong has also been making itself more welcoming to such Chinese listings by relaxing some of its strict standards that formerly made it difficult or impossible for fast-growth but money-losing startups to list on its main board. The latest relaxation saw it amend its rules this year to allowing money-losing “specialist technology companies” to list. That paved the way for AI drug company QuantumPharm (2228.HK) to make its trading debut last month as the first company to take advantage of the rule change.

A growing number of Chinese tech firms that would have gone to New York in the past, lured by higher valuations and greater trading volumes, are also now choosing Hong Kong. Those include names like ride-sharing firms Dida and CaoCao, and autonomous driving companies like QCraft and Zongmu, which have all filed recent Hong Kong listing applications.

All this brings us back to our question at the outset, namely, is Shein’s case the death knell for blockbuster Chinese IPOs in New York? While that case shows the climate certainly isn’t as warm as it was a decade ago – when Alibaba (BABA.US; 9988.HK) raised a record-breaking $25 billion in its 2014 New York IPO – there still may be some maneuvering room.

Of the roughly $600 million raised by Chinese companies through New York IPOs in the first half of this year, $440 million – or more than two-thirds – came from a single listing by Zeekr (ZK.US), the electric vehicle (EV) maker owned by leading Chinese automaker Geely.

Despite all the U.S.-China tensions, Zeekr’s listing made it through the obstacle course due to the company’s relatively limited pool of data, which probably helped it steer clear of any Chinese data security concerns. Its higher-tech nature also probably helped it avoid U.S.-based concerns over things like labor practices and IP theft. The company’s Geely background also probably helped, since the private carmaker is quite well connected in China and is also respected globally as the owner of international brands like Volvo and Lotus.

By comparison, Shein is a far scrappier company that was founded in Nanjing, though it has since rebased in Singapore. It rose to prominence by taking advantage of the kinds of cheap sweatshop-style factories that China was famous for in an earlier era during its rise as a global manufacturing hub.

At the end of the day, the bright lights of New York – and depth of the city’s two major stock markets – will continue to draw at least a limited number of major Chinese companies that think they can make it through the complex regulatory obstacle course. But the number will inevitably be smaller than during the earlier heyday for such listings, with perhaps only one or two per year raising sums in the hundreds of millions of dollars or higher.

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