How to Destroy a $100 Billion Valuation

Shiin is an incredibly successful Chinese fast fashion company known for making unbelievably inexpensive apparel that's insanely popular with Gen ZZ consumers. It was one of these companies that absolutely flourished during COVID times. They are an early adopter of promotional advertising on social media sites like TikTok, and for influencers, Shein fashion haul videos were taking off. Shoppers would tune in on TikTok and see their favorite influencers buying hundreds of trendy new outfits at a price that didn't break the bank.

The company itself went gangbusters amid the COVID-19 pandemic. In 2020, it reportedly made $10 billion in revenue, marking the fifth consecutive year of more than 100% sales growth for the company. In fact, things got so crazy that from April 2021 to April 2022, Shein's sales on a year-over-year basis more than doubled each and every month. The fast fashion retailer was taking over America, and in 2021, according to Earnest Analytics, Shein became the largest fast fashion retailer in the United States.

It was a good time for private investors too, with Shein's valuation doubling between August 2020 and mid-2021 from $15 billion to $30 billion. But the growth didn't stop there, and on the back of this explosion in popularity, the Wall Street Journal noted that based on a funding round in March of 2022, the fast fashion company's valuation had rocketed up to $100 billion USD. The company was a growth machine; they nailed the marketing, and the valuation was skyrocketing.

But this is where things get interesting. On the back of their sales explosion, the Chinese company, which is headquartered in Singapore, started throwing around the idea of a big US IPO. An IPO, or initial public offering, is where a company sells a big fresh packet of shares to the public for the first time, raises a whole lot of money, and then the shares start trading on an exchange. It's a win-win; Shein raises a whole lot of cash to help grow their business, and members of the public are now able to hold shares in what was before a privately held business.

Shein confidentially filed for a US IPO with the Securities and Exchange Commission in November 2023 after seeing its valuation slip from $100 billion down to around $66 billion. But what happened next was not what you might expect. It should have been an easy sell, right? A company going gangbusters with sales skyrocketing wants to let the public in on shares of the business. But the reception to this proposed IPO was far from the warm welcome they were hoping for.

In fact, numerous lawmakers, including 16 Republican attorney generals, called on the SEC to reject the proposed IPO, and the public was on their side. The lawmakers demanded that the SEC ensure Shein wasn't using forced labor in its supply chain before it allowed the company to start trading in the US. This is where it all started falling apart for Shein, as one of the secrets behind the massive profits investors wanted in on was being called out for the world to see.

As it turns out, you can't exploit the crap out of workers in foreign countries and still get listed on the New York Stock Exchange. A missive written by Montana's attorney general, Austin Knudson, and signed by 15 other Republican attorney generals stated, "We urge you to require, as a condition of being listed on a US-based securities exchange, that any foreign-owned company certify via a truly independent process that it is compliant with Section 307 of the Tariff Act of 1930, which prohibits the import of any product manufactured wholly or in part by forced labor."

This protest came after a House committee exploring economic competition between the US and China released a damning report back in June 2022 connecting both Shein and Teu to a disproportionate number of import violations surrounding forced labor in China. So what exactly is going on here? What is Shein being accused of? Well, this is where the story gets quite crazy. It took a lot of research, so before we continue, I quickly wanted to shout out Tube Magic, which has been instrumental in helping me prepare this video.

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Well, nobody knows for certain, and Shein annoyingly is very hush-hush on this sort of information. But the problems with forced labor stem from this region of China called Xinjiang. The US State Department itself has identified what it calls horrific abuses of the Uyghur people by the Chinese government in this region of China, including mass detentions, surveillance and control, cultural and religious repression, family separation, and what's particularly relevant to the case with Shein: forced labor. These abuses are part of a broader campaign of repression by the Chinese government, which has been widely condemned by international organizations, governments, and human rights groups.

This has also led the US to ban the importation of cotton and other products from the region back in 2021. They do not want any US companies or consumers to knowingly or unknowingly support what's happening in this region. But what's really interesting is that the Uyghur region actually produces 85% of all of China's cotton. So in the eyes of the CCP, it's actually really important economically for this cotton to still be bought by somebody.

What ends up happening is what can only be described as "cotton laundering." This is the process by which Xinjiang cotton is shipped to mainland Chinese factories, which will then sell it onto international intermediary manufacturers to create the clothes that will then be sold to the international brands, which can then ultimately be bought by the global consumers. By having these layers, the banned Xinjiang cotton can essentially be laundered and still be used for garments from leading retailers.

As you can imagine, that's exactly what Shein is accused of doing. In fact, laboratory testing conducted for Bloomberg News on two occasions in 2022 found that garments shipped to the US by Shein were made with cotton from China's Xinjiang region. They're able to do this through two different ways. The first is through sourcing garments from those international intermediary manufacturers. But bizarrely, there's an even easier loophole that they can exploit, and it's called the de minimis rule in US trade law.

The de minimis rule allows for goods valued at $800 or less to enter the US without being subject to tariffs, taxes, or extensive customs inspections. This rule is intended to simplify and expedite the import of low-value goods, particularly for e-commerce. But guess what? Because of this rule, Shein ships many of its products directly to US customers in small packages that each fall under the $800 threshold. Because these packages are considered low-value imports, they then bypass the detailed scrutiny that larger bulk shipments would face, including checks for compliance with bans on products made with forced labor, such as, you guessed it, cotton from Xinjiang.

Shein keeps the supply chain auditing to a minimum, keeps the parcel small, and sends them straight out of China. Estimates are that packages from Teu and Shein account for more than 30% of all packages shipped to the US daily under the de minimis provision. All in all, packages get sent, nothing gets checked, and no import taxes get charged. It's pretty good on Shein's side until it comes to their IPO.

Because of this uncertainty surrounding whether Shein is violating the Tariff Act of 1930, it seems as though their proposed US IPO has been stalled. In fact, when I say it's been stalled, it really sounds like the US IPO is dead. An interesting case of a reason for the company's success actually being the reason it ultimately stumbles. The National Retail Federation has repeatedly rejected Shein's membership applications. Public scrutiny remains sky-high over their forced labor allegations, as well as exploiting US tax loopholes. They're facing mounting political resistance, and as a company with strong roots in China, they also get swept up in the geopolitical tensions between the US government and the CCP.

Angelo Banas, an IPO analyst at Renaissance Capital, said at best in his quote, "Scrutinizing companies with high profiles and roots in China is very politically in vogue right now in the United States." And so that was that. Shein was defeated; they were found out, heavily fined by the US government, the loopholes were closed, and Shein was banned from stock exchanges globally and now will not be able to capitalize on a big IPO.

Yeah, that didn't happen. In reality, the Shein management team has just hopped on a plane and headed from New York to London instead, where the company now plans to list on the London Stock Exchange. "Fast fashion retailer Shein filed for London listing in early June," reports Reuters. Apparently, "Shein has updated Chinese securities regulators officially about its change of listing venue," said sources. The company, however, has yet to receive a nod from the China Securities Regulatory Commission.

This is where things get really interesting because now the London Stock Exchange is under fire for considering this listing. They have been accused of lowering their standards to accommodate the Shein IPO, something that David Schwimer—not that David Schwimmer, but that David Schwimer, the CEO of the London Stock Exchange Group—has since denied. However, with London suffering a massive IPO drought and with fundraising falling by a whopping 90% in 2022, people are very clued into the fact that this could be a headline scalp for the exchange, one that could very well get other firms to reconsider listing in London, particularly if they have a questionable thing or two going on that might prevent them from hitting the US exchanges.

It definitely helps that a few weeks before the UK election, the Labor Party confirmed that their MPs even met with Shein and have indicated their support for the controversial fashion company. However, the road to a potential UK Shein listing is far from clear. Shein's problems still follow them around, and interestingly in the UK, the human rights group called Stop Uyghur Genocide has even launched a legal campaign to block Shein's potential London listing over concerns about its labor practices.

A law firm representing the campaign group said just a few weeks ago that the human rights law firm Leigh Day has written to the UK's Financial Conduct Authority to urge the regulator to refuse any attempt by Shein to list on the London Stock Exchange. Amnesty International UK has even chimed in, saying Shein's potential London initial public offering would be a "badge of shame" for the LSE because of the fast fashion firm's questionable labor and human rights standards.

But regardless of whether they list or not, chances are the damage has probably been done for Shein. Ultimately, for a successful IPO, companies try and pick times of just incredible investor sentiment and hype around the shares. They do this because it enables them to achieve their IPO fundraising targets but sell fewer shares in the process or alternatively sell the same number of shares intended but raise more money in the process.

That's why you see periods of market euphoria line up very well with a lot of IPOs, whereas times when investors don't feel too good—2008-2009, for example—you rarely see any IPOs at all. But with that said, what do you guys think of Shein? Is their IPO doomed? Let me know down in the comment section below. And thank you again to Tube Magic for sponsoring this video. Again, you can try it free today by using the link in the pinned comment if you'd like. But with that said, thanks very much for tuning in, and I'll see you guys in the next video.