Investors heat up junk SOE stocks

Junk stocks of State-owned enterprises (SOEs) continue to be attractive investment targets for speculators hoping to profit from their restructuring bids.

In the latest instance of this trend, Huludao Zinc Industry Co, a Shenzhen-listed metal smelting and processing company which currently trades under a delisting warning (*ST) mark, has seen its shares rise 48.66 percent through the year-to-date as of Monday. Huludao Zinc's impressive results come even as the company's chances of permanent delisting look all the more probable as it approaches its third consecutive year of operating in a net financial loss.

Huludao Zinc, which was in the red through both 2010 and 2011, announced recently that it will likely write down a net loss of 3.71 billion yuan ($161 million) for 2012.

Meanwhile, as it teeters on the brink of bankruptcy, Huludao Zinc will undergo a scheduled suspension from Tuesday as it waits for a court ruling on its reorganization plans. If the court pronounces in favor of the plan before April 25, the day Huludao's audited financial results are set to be released, its listing is likely to remain.

"Partly because it's a State-owned company, speculators are betting that Huludao Zinc will be approved to restructure, which may enable it to resume trading," Qian Qimin, deputy head of market research at Shenyin & Wanguo Securities, told the Global Times.

Based on recent history, such beliefs are not entirely groundless. China's stock markets have seen several junk shares regain their footing through restructuring, and many of these cases have involved State-backed firms.

For example, Shanghai-listed Shenghe Resources Holding Co, an SOE which was marked with a risk warning after it suffered losses in 2010 and 2011, may report a net profit for 2012 since its restructuring plan was approved by the China Securities Regulatory Commission (CSRC) on December 28.

Between December 12 - when the company announced that regulators were reviewing its reorganization paperwork - and January 23, shares of Shenghe shot to the 5-percent daily limit 19 times.

Of the 89 stocks currently bearing ST or *ST marks, around 10 of them will likely see their warning signs removed through restructuring, among which eight are State-owned, according to recent reports in the National Business Daily.

Most of these companies have also seen sudden large rises in their share prices before and after their restructuring plans were announced.

"This kind of trend is not healthy for the stock market," Qian said. "Regulators need to ensure delisting rules are strictly enforced. Right now, many junk shares are still finding ways to survive, which leaves room for speculation."