Shein is a $66bn buyer’s regret waiting to happen

It’s not expensive clothes that you regret, but marginal purchases which seem to be a bargain and then quickly go wrong (unless you are a cabinet member using Waheed Alli’s credit card). Fund managers should therefore be cautious about spending money on what Gen Z consumers call “Shein hauls”.

The Chinese fast fashion giant, valued at $66billion in its most recent private funding round wants to list on the London Stock Exchange early next year. New York has given it the cold shoulder and the company would rather not list in Hong Kong which is becoming increasingly dominated by Beijing.

It is a matter of debate whether it should be possible for a company to sell its UK shares if they are taking advantage of tax rules that apply to small packages imported, undercutting high-street retail and benefiting from an opaque supply network.

Shein could enter the top tier of the FTSE 100 if it were to float, and sell more than 25% of its equity. There have been some indications that it may aim to sell even less. There is a free-market scenario where the institutions who determine the success of an initial public offering can decide for themselves whether Shein will fail as a publicly traded company.

The Singapore-based £2 Tshirt manufacturer, founded in 2008, is a victim of geopolitical tensions. The US views it with suspicion, and passed a law in 2020 to ban the import of clothing made with cotton using forced labour performed by Uighur Muslims from China’s Xinjiang Region.

Beijing views it as a possible traitor, because they are sensitive to the idea of a Chinese firm trying to deny their roots or contradicting the regime’s position on Xinjiang. Shein has stated that it has “zero toleration” for forced labor, but has avoided mentioning Uighurs and Xinjiang out of fear of offending China. Sources say that to do so would be the same as praising Taiwan’s independence.

China accused Calvin Klein’s American parent company of boycotting cotton sourced from Xinjiang last week. PVH had 30 days to respond or it would be blacklisted. It could have also been an alert to Shein.

Shein’s position allows it to ship clothing cheaply into the West. Shein made more than $2.5 billion in profits last year, on $45 billion worth of goods. The company initially buys thousands of designs from Chinese factories in small batches, and then increases the volume for those that become “viral”. The majority of orders are shipped from a warehouse located in a Guangzhou free trade zone and then air freighted in individual packages. This means that they often fall below the threshold for import duty. Parcels worth less than £135 in the UK are exempt from import duties. In the US, it’s $800 and in the EU, €150.

Most “normal” retailers pay duties when they send large consignments from China to warehouses in Western Europe for distribution. Amazon recognized the Shein model’s appeal over the summer, when it announced a plan for air-freighting goods from China to west consumers willing to wait longer in exchange for lower prices.

This won’t last. Washington proposed crackdowns on “overuse and abuse” of the $800 Rule. The EU has been looking into doing something similar. The traditional retailers lobbied Jeremy Hunt while he was the chancellor, and they are likely to continue with Rachel Reeves if America or Europe takes action. Shein claims that the company will still be successful without tax arbitrage but that it has been an important part of their success to date.

There is competition. Temu was launched by Pinduoduo’s Chinese online retail platform and has copied Shein’s style. It is aggressively pushing into the US. Analysts at Bernstein say Temu’s user base has grown to rival Shein and that it could sell $54 Billion worth of products this year.

Three years ago, the sentiment around UK ecommerce companies such as Asos or Boohoo crashed. Simon Irwin is an analyst with Tanyard Advisory. He said that there was a finite share of the market for an offer such as Shein’s, in any market. I suspect this market share may be smaller than what people believe. My gut feeling says that it is probably hitting a brick-wall in the major western markets.”

Governance is another important issue. Sky Xu is Shein’s founder. He leaves the frontman duties to Donald Tang, a Chinese American investment banker. But Xu holds 37 percent, and the majority of the remaining shares are held by venture companies such as Sequoia China. At some point, he will need to interact with the outside world. Shein, like Huawei, a company with a complex Chinese identity, is looking for a UK-based advisory board. This is likely to be nothing more than window dressing.

There will be a lot of hype and talk about how a London market that is weak should accept a multi-billion dollar float. Singapore is being hailed as an alternative venue. Professional investors will be able to see through them if they do their job properly. Caveat emptor is not translated in Chinese, but I think it should be displayed on any Shein shares sale.

When is a leaseback and sale not the same thing? Last week, Morrisons sold to Song Capital a 45-year stream of income from 75 supermarkets.

Clayton Dubilier & Rice – the private equity company that took over the grocer three years ago in a takeover topsy – has pledged to not do “any sale and leaseback transactions of material stores”. CD&R must pay off a massive debt pile. In that it creates operating leverage, the Song Capital deal violates the spirit, if no the letter, the 2021 commitment. Sir Ken Morrison would have said something pithy about the Song Capital deal, having once called a Morrisons boss’s strategy “bullshit”.