La humillante OPV de Shein presagia más problemas

Shein's embarrassing IPO foreshadows more difficulties. The stock plummeted 10% in its Hong Kong debut on Tuesday, reducing the company's valuation to $24 billion, 75% lower than its 2022 peak of $98 billion. Those anticipating the end of Shein's painful attempts to go public to resolve valuation issues may be mistaken. The reason is that its current valuation demands a series of optimistic assumptions.

The EU introduced a 3 euro surcharge on low-value packages in July. A similar measure in the US contributed to raising logistics management costs to 48% of revenue in the first quarter, up from 43% a year prior. Shein proposed shifting part of the costs to consumers. However, buyers are price-sensitive: China's exports of low-value products to the bloc fell 54% year-over-year in July, according to Trade and Transport.

The firm is testing new tactics, such as offering support to e-commerce brands trying to grow their online business. Revenue from these services grew impressively 9% in the first quarter, but the new business represents only 14% of Shein's earnings. Nevertheless, Shein values the company as if revenues, net margin, or both would quickly recover from the slump caused by tariffs.

In the first quarter, Shein's revenue grew by only 1% year-over-year, and its adjusted net margin stood at a meager 2.5%. Even if sales increase by 8% in 2027, based on annualizing the figures from January to March this year, and the margin improves to 3.8%—the average between 2023 and 2025, excluding one-time items—, to reach a valuation of $24 billion, the multiple would have to be an austere 16 times.

While that is below Inditex's 24 times, its financial performance is far from elegant. It resembles that of e-commerce firms like Alibaba, which trade at an average of 9 times, according to Visible Alpha. That would value Shein closer to $15 billion. Even that seems high, as most of those comparables have a larger share of revenue translating into profit.

The company can take solace in finally executing the IPO, and perhaps surprise with profits later. But, if it doesn't, this humiliation is unlikely to be the end of Shein's problems. The authors are Reuters Breakingviews columnists. Opinions are their own. Translation by Carlos Gómez Abajo is the responsibility of CincoDías.