ANALYSIS-Valuation risks loom for China's start-up market

* First 28 firms to debut on ChiNext on Oct. 30

* Avg historical PE of IPOs at 56, could hit 100 on listing

* Speculative fervour may make first 2-3 mths very volatile

* High ChiNext valuations could spill over into main board

SHANGHAI, Oct 22 - ChiNext, a long-awaited Nasdaq-style market that China hopes will turn local start-up firms into budding Microsofts or Intels, may be hobbled by hefty valuations even before its launch this month in booming Shenzhen.

Analysts expect measures to curb rampant speculation will spare ChiNext the risk of failure that befell other start-up markets, but excessive valuations fed by enthusiastic investors could rattle Chinese stock markets over the next few months.

Investors taking their cue from ChiNext may also push already high PE ratios on China's main board even higher, just as the authorities approve a steady flow of IPOs and fine-tune monetary policy to ward off a re-run of the asset price bubble that preceded last year's global financial crisis.

Regulators hope ChiNext will form a pillar of China's economy by funnelling much-needed investment into a private sector that is crowded with some 10 million small- and medium-sized enterprises (SMEs).

For now, they must first tackle the excessive speculation in new stocks that has dogged China's modern stock market throughout its 18-year history, partly reflecting the lack of investment channels in a country where residents have squirrelled away 26 trillion yuan ($3.8 trillion) in bank accounts.

A first batch of 28 firms will debut on ChiNext at the Shenzhen Stock Exchange on Oct. 30. They all completed IPOs in the past month, setting IPO prices at an average 56 times 2008 earnings -- ranging from 40 times for ship engineering designer Shanghai Bestway to 82 times for underground rail power system developer Dinghan Technology.

In comparison, the average historical price/earnings ratio of Shenzhen-listed shares is 39 times and the PE of stocks on China's main Shanghai Stock Exchange is 26. Both already appear pricey against 17 times for Hong Kong-listed shares.

KEY RISK

"High valuations will no doubt be a key risk, although we expect others, such as more frequent stock delistings, will endanger investments in the new market," said economist Jin Dehuan at Shanghai Securities and Futures Institute.

Jin and other analysts note that sky-high valuations were partly to blame for other start-up markets to fail, such as the doomed 2003 merger of Germany's New Market into the main board.

The 28 new ChiNext listees, almost all private companies in contrast with the domination of state-owned corporations on China's main board, raised a combined 15.5 billion yuan in their IPOs, more than double the planned 7.1 billion yuan, and locked up a huge 1.87 trillion yuan in subscription funds, with an average oversubscription ratio exceeding 120 times.

More than 100 companies are on ChiNext's waiting list.

The huge interest has created dozens of yuan billionaires overnight, such as Pu Zhongjie, president of equipment maker Lepu Medical Technology, whose holdings in his firm are now worth 1.75 billion yuan.

Market debuts are sure to create more super-rich, as analysts note it is typical for IPOs listing in Shenzhen to double or triple on the first day of trade because of low capitalisation.

An informal survey of eight economists, analysts and fund managers forecast the average historical PE of the 28 will exceed 100 times after the first day of trade, despite the Shenzhen bourse setting strict debut-day circuit breakers and other risk-control steps.

In contrast, the companies' average earnings growth is not expected to surpass 30 percent a year over the three years from 2009, according to those surveyed, suggesting investor enthusiasm far exceeds the companies' profit growth potential.

"We weren't active in subscribing to the ChiNext IPOs, nor will we take an active part in trade immediately," said one Chinese fund manager in Beijing, who aims to steer clear of the boom-and-bust cycle expected during the market's initial two or three months. The manager declined to be identified because he was not authorised to talk to the media about the market.

Several fund managers expect interest will ebb after 2-3 months, especially if some retail investors are badly burned.

A cooling off may allow valuations to drop and investments to take a more rational approach. (Editing by Ian Geoghegan)