Shein’s Potential to Revive the London Stock Exchange

The anticipated initial public offering (IPO) of Shein, the fast fashion behemoth, on the London Stock Exchange (LSE) could surpass any stock exchange listing witnessed in Europe over the past year. With the LSE currently facing challenges in attracting new listings, as some companies have opted for other exchanges, this flotation could prove to be a much-needed boost. It is therefore not surprising that the Chinese company has garnered interest from the UK government, the LSE, and those promoting the City of London.

However, ongoing concerns remain regarding Shein’s controversial business practices, particularly after its founder Chris Xu moved both himself and the company’s headquarters to Singapore in 2022. These concerns intensified when Shein’s legal representative found it challenging to clarify whether the company utilizes cotton sourced from China during a session with the UK’s business and trade parliamentary committee.

A campaign group named Stop Uyghur Genocide has recently announced its intention to pursue a judicial review if the UK’s Financial Conduct Authority (FCA) approves Shein’s LSE listing. Furthermore, a grassroots initiative called “Say No to Shein” has gathered nearly 50,000 signatures on the activist platform 38 Degrees. (Shein contends that it has a strict prohibition against forced labor within its global supply chain.)

Cynical observers may question the wisdom of the UK government courting such a contentious listing, especially since Shein initially aimed for a US market listing that fell through amid concerns surrounding forced labor and other issues.

So, what exactly are the allegations against Shein? From an environmental, social, and governance (ESG) perspective, the company is seen as controversial. Although Shein states that it’s making efforts to minimize its environmental footprint, its business model—selling items at prices low enough to be discarded after one use—contradicts the principles of more sustainable consumption and thus raises issues regarding the “E” in ESG.

Some critics even suggest adding an additional “E” for ethics to the acronym. The concerns surrounding human and labor rights within Shein’s supply chain and the company’s unwillingness to discuss these issues openly—evident even to a parliamentary committee—underline the “social” and “ethical” challenges. Nevertheless, the company claimed last year that it is actively engaged in enhancing the practices of its suppliers.

If less than 10% of Shein’s equity is floated, as the company proposes, it will still remain under the control of its founders and majority shareholders, much like a fully private enterprise. A listing on the LSE would typically require Shein to adhere to the UK corporate governance code or explain its reasons for non-compliance. However, with minority investors holding less than 10%, they would have limited influence over a company that remains predominantly owned and governed by a small group of founding investors.

Thus, a float of 10% or less could raise serious concerns about the “G” for governance among minority shareholders, especially if their stake is involuntary, such as through an employee pension scheme. Nevertheless, Shein has responded by establishing a sustainability committee, as mentioned in a social impact report, to fortify corporate governance.

Given these concerns, who stands to gain and who stands to lose from this proposed listing? Surely, Shein could be a beneficiary. Common rationale for a stock exchange listing includes raising capital for investment or providing founders with a chance to liquidate their holdings. Additionally, a listing might simplify future mergers and acquisitions and incentivize employee retention by offering favorable share purchase terms.

Moreover, there is no denying that such a listing would be portrayed as an encouraging indicator of the UK’s openness and attractiveness for business. It would yield an initial financial boon as well as ongoing revenues for the LSE, along with significant fees for financial and legal service firms in the City of London.

Downsides

If Shein transitions from being a private company, which has maintained financial confidentiality, to a publicly listed entity, it will be compelled to reveal details regarding its legal and reputational risks alongside its financial accounts.

This disclosure will enable potential investors to estimate a pricing range for the IPO. Recent reports indicate a possible total equity valuation between $50 billion and $66 billion (£40 billion and £52 billion), but if the listing does not materialize, estimating its market value with accuracy using existing public information would be challenging.

The company’s evident preference for secrecy and reluctance to release detailed financial figures may indicate discomfort among its founders and major stakeholders with the heightened scrutiny that public listing entails. Nonetheless, a 2023 report suggested Shein’s commitment to “continued progress and transparency” regarding sustainability and its social influence.

Should credible evidence surface concerning controversial business operations—such as forced labor or unlawful working conditions—it could severely impact Shein’s stock valuation. Certainly, external investors are likely to examine Shein’s operations closely, unlike consumers purchasing a £10 dress for a brief occasion.

A cautionary tale can be drawn from the experience of the UK’s much smaller fast fashion rival, Boohoo.com, which currently has a valuation of approximately £400 million after peaking at over £5 billion in 2020. Following an initial surge, Boohoo’s stock price never rebounded after revelations emerged regarding workers within its UK supply chain earning as little as £3.50 per hour.

An independent review published that year uncovered numerous shortcomings in Boohoo’s UK supply chain operations, prompting the company to commit to fully implementing the review’s recommendations. However, a BBC Panorama investigation later revealed that these pledges have not been honored. Today, with its stock price hovering below 30 pence per share, it has suffered a decline of more than 90% since the onset of the scandal. (In response to the program, Boohoo maintained that it has adhered to all the independent review’s recommendations.)

Should Shein’s listing proceed, it would bring the company’s inner workings under a level of public scrutiny that it has not previously encountered. Already, there are discussions around the company’s business practices among individuals who may not have previously engaged with fast fashion.

If awareness is the first step towards progress, such heightened scrutiny can be beneficial for those advocating for transparency regarding the darker facets of the fast fashion industry.

Isaac T Tabner, Senior Lecturer in Finance, Director of the MSc Finance, University of Stirling

This article is republished from The Conversation under a Creative Commons license. Read the original article.