MONEY-LOSING companies viewed as prime shells for backdoor stock-exchange listings have been enjoying a resurgence in share price after regulators delayed reforms easing the path for initial public offerings.

Many of these perceived target companies have such heavy losses on their books that regulators have consigned them to a pariah category known as “special treatment” listings. It’s a step away from delisting.

One of them, Gansu Huangtai Wine Marketing Industry Co Ltd, landed in that category after posting losses for two consecutive years. Yet its Shenzhen-listed shares increase by more than 50 percent in the past month, compared with a 10 percent gain in the Shenzhen Component Index.

Shares of the Inner Mongolia Chilechuan Technology & Development Co Ltd, another “special treatment” company, gained more than 30 percent during the same period.

China’s securities regulator requires that companies showing two straight years of losses or those believed to have “unusual” financial situations be tagged “special treatment” listings as a signal to investors that they are risky.

Instead of risk, some investors see opportunity. Shell companies can be taken over through reverse mergers and their listings passed on to the acquirers, who may be in altogether different businesses.

The current mania for shell companies was triggered after Liu Shiyu, the newly appointed chairman of the China Securities Regulatory Commission, told a press conference in mid-March that it will take more time for the launch of a registration-based system for IPOs, which is considered a key market reform. The delay was seen as a balm for investors rattled by periodic turbulence in the nation’s Class A-share market and the prospect of a flood of new listings.

The registration-based IPO system, which was widely expected to be introduced sometime this year, is aimed at reducing regulatory intervention and speeding up the listing process for companies.

Long queue

In addition to that setback, a plan to introduce a new strategic emerging industries board on the Shanghai Stock Exchange seems to have disappeared from the pipeline. Its creation was first announced by the securities regulator last June and confirmed by the State Council, China’s cabinet, last December. It was supposed to open sometime this year, offering easier access to listings for high-growth and innovative companies.

But when a revision of China’s 13th Five-Year Plan was released by the recently ended national parliamentary session, mention of the plan had been dropped. Investors are now wondering if the board has been scrapped altogether.

All these development have dealt a blow to companies standing in line, waiting for the chance to go public. As of April 14, there were 653 companies in the queue for regulatory approval.

The queue has been lengthened by a number of Chinese companies delisting from overseas exchanges and looking at relisting on Shanghai or Shenzhen exchanges. That trend began in the first half of last year, when China’s stock markets were booming. More than 35 foreign-listed companies, most of them on New York exchanges, went private and announced plans to relist at home. They include online video platform Youku Tudou Inc, China’s largest budget hotel chain Homeinns Hotel Group and film distributor Bona Film Group Ltd.

“The unspecific delay is a major blow for overseas-listed companies eyeing a home listing,” said Zhang Yidong, analyst with Industrial Securities. “The strategic emerging industries board was seen as an appealing channel for those companies to come home, especially for Internet firms with unstable earnings. The new board was expected to have lower listing requirements on profitability than the current ChiNext board in Shenzhen.”

But the dismay of some becomes the delight of others.

With back-door listings via reverse mergers becoming a fast track to a listing in China, potential shell companies are drawing a lot of attention from investors.

Rising risk

After Qihoo 360 Technology Co Ltd, a Chinese Internet security firm listed on the New York Stock Exchange, announced it had received shareholder approval for privatization and delisting, share prices in a number of potential shell companies in China surged, including those having the number 360 in their stock codes.

Investors are betting that shell companies could become cash cows, and there are precedents backing up that view.

Last year, Chongqing New Century Cruise Co Ltd announced that it was being taken over by online game developer Giant Interactive Group Inc., which was delisted from the New York Stock Exchange in 2014. Shares in New Century Cruise subsequently rose by the daily 10 percent limit for 20 straight trading days late last year. They have soared more than 500 percent since the Giant Interactive announcement.

“Shell resources on the A-share market do provide notable investment opportunities due to roadblocks to IPOs,” analysts with China International Capital Corp said in a report. “Instead of waiting until the announcement of specific reverse merger plans, investors are scouring for candidates in advance to bet on.”

In doing that, investors would be well advised to focus on small shell companies with market values of less than 5 billion yuan (US$781 million) because such companies are most attractive to potential shell buyers, the investment bank said. It also recommended companies with dispersed ownership structures, making mergers easier.

However, high profits often come with high risks. That is especially true now that the securities watchdog is stepping up efforts to streamline China’s delisting system and weed out “trash stocks.”

In that past, it was difficult to delist a company, no matter how poorly it was performing.

Since 2001, when a delisting scheme was first introduced in the market, only 33 companies have been forced out of China’s two stock exchanges due to chronic losses.

In 2014, China’s securities regulator introduced stricter delisting rules, making it easier to expel not only loss-making companies but also those in violation of regulatory practices.

The Shanghai Stock Exchange last month delisted Zhuhai Boyuan Investment Co Ltd for violating rules on information disclosure, amid charges that it forged commercial bills and inflated assets and profits. It was the first company to be ousted since the new rules were implemented.

Analysts say they expect more delistings to follow as the regulator seeks to bolster investor confidence after the market crash last year.

“The delisting of Boyuan showed the regulator’s resolve to improve the system and delist more problematical companies,” said Song Qinghui, a financial commentator. “But as the delisting system improves, it’s getting riskier for investors to chase shell candidates under threat of delisting.”