Why prop traders should closely watch Shein’s potential IPO
Shein, the ecommerce retail group, is considering an IPO in London. However, there are concerns about the company’s reputation, as some customers have been disappointed with the products delivered. As a proprietary trader, the potential IPO of Shein, the ecommerce group, in London presents an intriguing opportunity. However, there are several factors that need to be considered before making an investment decision.
The following are essential points to watch out for to make an informed investment decision regarding Shein’s potential IPO.
| ✔️ | Key Points | ✔️ |
|---|---|---|
| ✔️ | Company Reputation: Evaluate Shein’s product quality and customer satisfaction to ensure sustained trust and sales. | ✔️ |
| ✔️ | IPO Rationale: Understand Shein’s reasons for going public, particularly the implications of “enhanced transparency.” | ✔️ |
| ✔️ | Supply Chain Ethics: Verify Shein’s measures to address forced labor allegations and ensure ethical sourcing practices. | ✔️ |
| ✔️ | Corporate Governance: Assess Shein’s governance structure, ensuring equal voting rights and transparency in its corporate operations. | ✔️ |
| ✔️ | Valuation and Growth Strategy: Analyze Shein’s realistic growth prospects, valuation, and potential regulatory risks. | ✔️ |
Considerations for investors
Firstly, the company’s reputation is a crucial factor. Shein’s executive chair, Donald Tang, needs to clarify why the company wants to go public, as he has downplaying some of his reasons and insists “enhanced transparency”. Supply chain concerns, particularly allegations about forced labour, need to be addressed. Shein has gained popularity on social media platforms like TikTok, where videos of shoppers displaying their purchases can reach thousands of views. However, there are also videos comparing the promised products to the disappointing ones delivered.
Shein denies these allegations by unsatisfied customers and claims to have severed ties with non-compliant suppliers in 2023. Governance concerns also exist, related to Shein’s corporate structure and expected small free float. Tang could give confidence to investors by ensuring equal voting rights for all shares. This discrepancy between expectation and reality is a red flag, as it could potentially lead to a loss of customer trust and subsequently, a decrease in sales.
Secondly, Shein’s reasons for going public need to be scrutinized. Donald Tang, has not provided an explanation yet how an IPO to raise capital can provide an exit for early investors. Instead, he has focussed on the benefits of ‘enhanced transparency’.
A prop trader would most likely want to understand what this means in practical terms. Does ‘enhanced transparency’ imply more rigorous financial reporting, or does it suggest a shift in corporate governance? Shein’s valuation and growth strategy also need to be evaluated. The company promotes itself as an AI-powered tech play, but this seems unrealistic. Its reported target valuation of about £50 billion suggests it might benchmark itself closer to Zara-owner Inditex.
Thirdly, supply chain concerns have been raised by some fund managers. Shein has faced allegations about forced labour in its cotton supply chain, which it denies. In 2023, it reportedly severed ties with a small number of suppliers in China that did not meet its standards. However, more frequent, independent audits will be necessary to address these concerns. Most prop traders would want to see concrete steps taken by Shein to ensure ethical sourcing and production.
Fourthly, there are governance concerns related to Shein’s corporate structure. The company’s ultimate parent is registered in the Cayman Islands, and there are expectations of a small free float. Tang could give confidence to investors by ensuring that all shares carry equal voting rights. A dual-class structure that entrenches the rights of pre-IPO investors could be seen as unhelpful and unnecessary.
Lastly, Shein’s valuation and growth strategy need to be evaluated. The company has been promoting itself as an AI-powered tech play at retail conferences, suggesting a tech-style multiple. However, this seems unrealistic. Its reported target valuation of about £50 billion suggests it might benchmark itself closer to Zara-owner Inditex, which trades on 23 times forward earnings. Even then, a decent discount would be required due to regulatory risks. Some countries are trying to close tax loopholes used by Shein and others that ship lots of small packages direct to customers. Shein insists its growth doesn’t rely on these loopholes remaining open.
London debut
For a successful London debut, Tang must bridge the gap between how Shein sells itself and what some investors, including prop traders, believe it will deliver. This involves addressing concerns about product quality, supply chain ethics, corporate governance, and valuation.
As a prop trader will need to look for clear, concrete actions in these areas before considering an investment in Shein’s potential IPO.
A decent discount would be required due to regulatory risks. For a successful IPO, Tang must bridge the gap between how Shein sells itself and what investors believe it will deliver. Tang will need to convince investors that Shein does not rely on tax loopholes only.
