[Edaily Marketin Won Jae-yeon Reporter] SHEIN, which shook up the global fast-fashion market with its $5 dresses, has seen its valuation shrink by nearly 100 trillion won in just four years. During the COVID-19 pandemic, SHEIN was hailed as a “tech company of the fashion industry” for its ability to analyze online trends in real time and rapidly produce clothing at its Chinese factories. At the time of its 2022 funding round, its valuation reached $98.2 billion (approximately 140 trillion won).

However, as its stock market debut approached, investor sentiment shifted. This was due to the U.S. and Europe successively eliminating tax exemptions on small-value imports—which had supported SHEIN’s ultra-low-price sales—as well as a rapid slowdown in revenue growth.

On July 10, the China Securities Regulatory Commission (CSRC) approved SHEIN’s Hong Kong IPO. According to foreign media outlets such as Reuters, the target valuation currently under discussion is approximately $30 billion to $40 billion (42 to 56 trillion won), which is about 69% lower than the $98.2 billion (140 trillion won) valuation recognized during its Series D funding round in 2022.

Algorithms Behind the ‘$5 Dress,’ China’s Supply Chain, and Duty-Free Sales

The explosive growth in online consumption during the COVID-19 pandemic was the driving force behind Shein’s valuation approaching 140 trillion won. While traditional fashion companies reliant on brick-and-mortar stores struggled to stay afloat, Shein rapidly attracted young consumers in the U.S. and Europe through smartphones.

Its growth model also differed from that of traditional fashion companies. While established fashion brands like Zara and H&M produced products in bulk based on seasonal demand forecasts, Shein analyzed online search and purchase data to produce small batches of items with high trend potential, then placed additional orders based on actual consumer response. It discontinued production of slow-moving items and rapidly ramped up production of popular items, thereby reducing inventory burdens.

This small-batch production model was made possible by China’s apparel supply chain. China’s apparel industry ecosystem, centered around Guangzhou, features a high concentration of fabric and accessory suppliers as well as garment factories, enabling the rapid production of even small orders in the hundreds of pieces. Shein connected its proprietary system to this network, sharing order volume, inventory, and sales data with suppliers.

Shein’s price competitiveness was further enhanced by the U.S. duty-free system. The U.S. operates the “de minimis” system, which exempts overseas direct purchases of $800 (approximately 1.14 million won) or less from customs duties, allowing American consumers to buy Shein clothing made in China at even lower prices. The combination of low production costs, minimal inventory burdens, and duty-free direct shipping enabled the company to flood the global market with clothing priced at just a few dollars.

Growth Slows as Preferential Treatment Ends… Burdened by Rising Valuation

The change in Shein’s growth formula came as major markets began rolling back duty-free benefits. Last May, the U.S. abolished duty exemptions for small-value imports worth $800 (approximately 1.14 million won) or less from China and Hong Kong. The European Union (EU) also began imposing provisional tariffs in July of this year, eliminating the duty exemption previously applied to cross-border e-commerce goods worth 150 euros or less.

Shein now faces a dilemma: if it passes on customs duties and clearance costs to prices, its strength as an ultra-low-price retailer will weaken; if it absorbs these costs to maintain prices, its profitability will decline. In effect, the very business environment that enabled Shein’s rapid growth in the past has changed.

This shift is also reflected in its financial results. In fact, Shein’s U.S. revenue for the first quarter of this year fell 14.3% year-over-year, and the company posted a net loss of $99 million (approximately 140 billion won). Revenue growth slowed from 20.7% in 2024 to 8.0% last year, and in the first quarter of this year, it grew by only 1.1% compared to the same period last year. While revenue is still growing, the rapid growth rate that once underpinned its high valuation has effectively vanished.

As the earnings that underpinned its valuation have faltered, Shein—which is preparing for its IPO—has run into another problem. This is because the average investment cost for shareholders who invested at high prices following the COVID-19 pandemic is now significantly higher than the company’s current market valuation.

IPO Hindered by Investor Protection Clauses… Shein Caught Between a Rock and a Hard Place

In 2022, Shein raised $1.8 billion (approximately 2.6 trillion won) at a valuation of $98.2 billion (approximately 140 trillion won). The following year, it lowered its valuation to $64 billion (approximately 91 trillion won) and raised an additional $1.7 billion (approximately 2.4 trillion won). Hongshan (formerly Sequoia China), General Atlantic (GA), and Cotu Management participated in the investment round during this period.

At the time, investors purchased shares at high prices with a U.S. stock market listing in mind. However, after the New York listing fell through, the company shifted its focus to London and then moved the listing to Hong Kong, delaying the exit window by several years. During that time, Shein’s valuation also fell from 14 billion to its current level of around 4 billion won.

Shein finds itself in a bind because it promised safeguards to these late-stage investors—including Sequoia—who entered at high valuations, to protect them against listing delays and price declines. Shein agreed to pay a return of approximately 8% for the period during which the listing was delayed, and the cash it must pay to existing investors has now swelled to about $1.1 billion (approximately 1.6 trillion won). The longer the IPO is delayed, the greater the compensation burden becomes.

However, lowering the valuation to meet market expectations is also a burden. This is because if the offering price falls below the existing investment price, the company would have to provide additional cash or shares to some investors. In particular, price protection clauses apply to Hongshan and GA—investors from the 2023 D+ round—allowing them to receive more shares if the offering price falls below their investment price. Last March, Shein extended similar protections to investors from the 2022 D and Pre-D rounds.

For Shein, this Hong Kong IPO has become less about raising capital and more about how to resolve the terms agreed upon with past investors. Delaying the listing would increase compensation costs, while lowering the price would require additional compensation for existing investors. The valuation from the private market—which four years ago made Shein a 140 trillion-won company—has now become the most difficult challenge to overcome in the Hong Kong IPO.