* Valuations at 67 times, vs 25 times for Nasdaq stocks
* Expiry of lock-up periods from Nov. 1 could flood market
* Ample liquidity could cushion any sell-off -analyst
By Samuel Shen and Jacqueline Wong
SHANGHAI, Oct 26 (Reuters) - One year after a much-hyped launch, China's Nasdaq-style second board has become the casino type marketplace that many predicted, putting it at growing risk of a correction as share prices get well ahead of profit growth.
The 130 firms listed on China's second board, called ChiNext, now trade at 67 times 2009 earnings, nearly triple the 23 times for the Shanghai Composite Index and 25 times the Nasdaq, which ChiNext hopes to emulate.
Those high-flying valuations -- at one point soaring to 127 times earnings -- contrast sharply with the companies' luckluster profit growth and give the market an eerie resemblance to the Nasdaq boom before the dot-com bubble burst in 2001, analysts say.
Now, as ChiNext's one-year anniversary approaches, the market faces its first major test as the lock-up period for major shareholders start to end.
"This market is very speculative, characterised by high valuations and volatility," said Soochow Securities analyst Tang Wanshan. "Many investors anticipate a big drop."
China launched ChiNext in the boomtown of Shenzhen last October to help fund cash-strapped private start-ups as part of a broader move to shift the economy from traditional manufacturing towards more innovative, higher-value industries.
ChiNext has provided desperately needed funding to China's private enterprises, crucial in creating jobs and fostering innovation in the world's second biggest economy.
More than 100 companies, including movie maker Huayi Brothers and outdoor sportswear maker Beijing Toread are now listed there, with the first batch of 28 approaching their debut anniversary on Oct. 30.
The anniversary will be a trial for the index as lock-up periods for big shareholders start to expire.
About 1.2 billion shares of 27 ChiNext-listed companies, worth around 30 billion yuan ($4.5 billion), will be freed from their 12-month lock-up periods on Nov. 1, more than doubling the number of tradable shares in these companies. Other firms on the market will follow as their one-year anniversaries approach.
"That would be a test for ChiNext, which apparently has been running smoothly so far," said Zhou Liang, fund manager at Zheshang Securities.
"The market is a mixed bag of good companies and bad ones, so once most shares become tradable, it would not be hard to see whether the pricing is right or not."
RIGHT VALUATION?
Many big shareholders, including venture capitalists and private equity funds, may look to lock in handsome profits as they close out their investments, said Chingxiao Shao, managing partner of SMC China Fund, which buys high-growth Chinese firms.
"Currently, valuation is not right," said Shao, who currently owns no ChiNext stocks. "We want to wait until November comes."
The market's high valuations reflect the fact that the share prices of most ChiNext firms are rising much faster than their earnings.
ChiNext company earnings grew by 22.65 percent on average in the first half of 2010, slowing from an annual pace of 45.69 percent in 2009 and lagging the 45 percent growth rate for all mainland-listed companies in the same period.
"If (ChiNext) companies continue to grow 50-70 percent every year for the next three years, they're not expensive," said Shao. "But given the short history of all these companies, I simply don't believe they can deliver."
Put off by the market's speculative nature, Shao's China New Market Fund bought only three ChiNext stocks, including Aier Eye Hospital Group Co and Lepu Medical Technology Beijing, out of 30 on her radar screen. She dumped them all about 3-4 months after the launch of ChiNext.
SOFT LANDING?
Despite a sudden boost in tradable shares as lock-up periods end, the ChiNext bubble could persist for a while -- fuelled by ample liquidity and investor preference for smaller firms in China, according to Guo Yuhui, vice president of Credit Suisse Founder, Credit Suisse' Chinese brokerage venture.
"Valuations may come down gradually, but I don't see any big changes in the short term," Guo said.
"China's second board stocks are more expensive than those traded overseas, but valuation is not crazy, given that the Chinese economy is growing faster and there's a lot of money flushing around."
China's 130 ChiNext companies have a combined market capitalisation of about 550 billion yuan ($83 billion), less than half of the value of Nasdaq-listed Google, making it hard to satisfy demand from Chinese investors keen to bet on the next Google or Apple to emerge out of China.
"I've been investing for 25 years and once in a life time you see something like Apple, Google or Baidu," said SMC China Fund's Shao, making a reference to the Chinese Internet search giant listed on the Nasdaq.
"I still think over the next 2-3 years, you'll have a Chinese Microsoft or Chinese McDonald... But a baby has to grow, you don't expect him to become a giant tomorrow." ($1=6.6449 Yuan) (Additional reporting by David Lin; Editing by Doug Young and Dhara Ranasinghe)