Another IPO disappoints, may signal problems with the market

GDS Holdings rings the opening bell at the Nasdaq site in New York, November 2, 2016.
Source: Nasdaq

GDS Holdings, which runs data centers in China, has opened at $10 on the Nasdaq, after pricing at $10, well below the price talk of $12-$14.

This is the second China IPO to disappoint in a week, after package delivery service ZTO Express priced at $19.50, above the range, opened at $18.40 and is now languishing in the $16 range.

What's up? There are two problems:

1) The weaker markets are impacting the overall IPO market. With stocks trending down in the past week or so, we have been in a bit of a risk-off IPO market in general. Only 40 percent of the 20 IPOs that have gone public in the last month are above their IPO price, according to Renaissance Capital. That includes high-profile names such as Quantenna and ZTO Express.

2) There are some very specific concerns about the Chinese economy and Chinese companies. Last week, parcel delivery service ZTO generated excitement because it offered to the Chinese consumer and to Chinese e-commerce business. It fizzled, largely around uncertainty on growth prospects.

Today, GDS Holdings generated interest because it was a pure tech play in China. But again, there appear to be some concerns on the 50 percent-plus growth rate claimed by the company, according to Kathleen Smith at Renaissance Capital.

"We are trying to project returns in the future, so you have to be confident in your model," Smith explained. That's a lot tougher to accomplish when you're dealing with Chinese companies, so the uncertainty factor is much higher.

There's also some company-specific issues. "The company as a relatively small customer base. Five companies are two-thirds of their revenues. They also have high capital expenditures," said Smith.

That's not surprising, since they run data centers, but you get the point: Lots of pushback when you have a jittery market and uncertainty around the numbers.

The GDS CEO, William Huang, will be on Power Lunch today at 2:30 p.m. ET.