By Yantoultra Ngui and Selena Li

SINGAPORE/HONG KONG, July 27 (Reuters) - Investors are expected to scrutinise whether Shein can justify the $40 billion to $50 billion valuation it is seeking in a Hong Kong initial public offering after a prospectus filed on Sunday showed slowing growth and a sharp decline in profitability.

Revenue rose 8% to $41.8 billion in 2025, but net income fell 39% to $2.06 billion. In the first quarter of this year, the fast fashion retailer swung to a $99 million loss, the filing showed.

While the quarterly loss partly reflected a $328 million fair-value charge on convertible redeemable preferred shares following an accounting change, slowing revenue growth and weaker core earnings underscore the company's mounting challenges.

"Institutional investors on the HKEX (Hong Kong Stock Exchange) will ... zero in on the 2.9% operating margin," said Winston Ma, executive director of the Global Public Investment Funds Forum and a former managing director at the China Investment Corporation.

"Investors will re-price Shein away from a pure hyper-growth tech platform toward a physical retail and logistics player navigating high-friction global trade."

The narrowing margin adds to concerns that Shein's rapid rise is encountering headwinds from higher trade costs, increased regulatory scrutiny and intensifying competition in global e-commerce.

The company said that the removal of the U.S. de minimis exemption had hurt sales growth, increased expenses, and it was "pursuing a wide range of options including increasing prices in the U.S." to offset a portion of the increased costs.

Europe's new fee on low-value imports poses another challenge - Shein said it was possible that trends in the EU could be "generally in line with or exceed the impact observed" in the United States.

Shein's challenges in Europe could lead to a lower level of competitive intensity at the value end of the market, which could be positive for fashion retailers Primark and H&M, Citi said in a note.

VALUATION PRESSURE

The prospectus showed Shein's valuation fell from $98.2 billion following a fundraising round in 2022 to $64 billion after another funding round in 2024.

"I argue that Shein will unlikely achieve a substantial uplift in valuation either at its Hong Kong IPO or in the secondary market compared to its last private fundraising round," said Shen Meng, director at Beijing-based boutique investment bank Chanson & Co.

"It would have been so much more optimistic if they went with their London or New York IPO a couple of years ago. The market by now has got a lot more difficult for them," said Juozas Kaziukenas, an e-commerce industry analyst.

"There's no proposed solution to the declining growth," Kaziukenas said.

With U.S. sales contracting since 2025 and growth in Europe slowing because of tariff changes, Kaziukenas said revenue in the two markets - which together account for more than 50% of Shein's global total - was likely to remain stagnant in the near term.

"Shein's short-term future is going to happen in 'Rest of the World' countries, not Europe or the U.S.," he said.

Even before the filing, some investors had questioned whether the targeted valuation left sufficient room for those risks.