Investors could be forgiven for thinking Aluminum Corp of China’s return to profitability, fatter margins and surging share price makes the lightweight metal producer a stock to own. It doesn’t.

The company, better known as Chalco ( 2600.HK ) (601600.CH) ( ACH ), may be a giant of China’s aluminum industry but it’s a pygmy where it counts: profits, revenue growth and return on capital. The first quarter results delivered a miserly profit of CNY63 million struck off a 22% year-on-year fall in revenue, the lowest top line performance since the global financial crisis. While at first brush these numbers may appear uninspiring, the depressing reality is they represent a significant improvement on the CNY10.8 billion loss delivered in the prior quarter.

Although investors don’t seem bothered with whimsical concerns like earnings growth given Chalco’s Hong Kong and Shanghai shares have, respectively, powered 50% and 53% higher this year. This represents a victory of momentum investing over the underwhelming fundamentals of China’s aluminum industry, one in which the price for the lightweight metal actually posted a 4% decrease in the quarter. The fact the company is looking to raise equity capital through the issue of additional Shanghai-listed A shares is tacit admission by management that the current share price may be as good as it gets for a while, a sentiment with which Barron’s Asia agrees given the massive premium to book value at which the stock trades.

China’s aluminum industry has always been trigger happy. Producers cut supply when prices are down and margins under pressure, but as soon as there is a glimmer of hope that prices are on the up then management has typically been quick to turn up the dial and bring idled capacity back online. Chalco is guilty of this type of behavior and the widening of its gross margin to the highest level in three years, helped by lower costs, may just entice management to restart its smelters and bring additional supply into China’s oversupplied market and possibly into the finely balanced global market. Although, gauging what’s happening with Chalco’s production is difficult given the company failed to release first quarter sales volumes.

Overcapacity lies at the heart of the Chinese industry’s problems and Chalco needs to do its bit to deal with a glut of the metal. “Less is more” appears to be the management mantra in the global metals and mining industry but Chalco apparently didn’t get the memo. The theory is that a simplified and focused portfolio of assets is the right path to take in the pursuit of higher returns at a time of beaten down commodity prices. While the market debates the pros and cons of BHP Billiton’s $15 billion spinoff of its non-core assets into South32, investors have got too far ahead of themselves on the turnaround prospects for China’s largest aluminum producer given the super slow motion pace at which it is restructuring and shedding its wanted assets.

Chalco needs to increase the tempo of its restructuring efforts given the challenging fundamentals of China’s aluminum industry. While the global supply and demand is finely balanced, China’s aluminum industry remains plagued by high costs and pollution emitting overcapacity. Many of Chalco’s assets sit on the wrong end of the cost curve, which means investors would be better served looking elsewhere for a way to play aluminum.

The combination of excess supply and weak aluminum prices has left Chalco’s finances stained with red ink. It defies credulity that a company that has recorded negative free cash flow – or cash available for distribution to investors – for the past six years could enjoy such a hefty rise in its share price, especially given analysts forecast the trend to continue into 2015. While heavyweights of the global aluminum industry like Alcoa, Rusal and Norsk Hydro have decided to shrink their way to glory through capacity cuts and strict capital expenditure discipline, Chalco continues to keep spending.

The brutal economics of where Chalco sits on the cost curve should spur the company’s management to take a more forceful approach to restructuring. Bernstein Research estimates that its assets inhabit the highest quartile of costs for aluminum smelting and bauxite mining, while its alumina refining assets fare only slightly better. With Shanghai Futures Exchange aluminum down about 8% over the past six months, it is difficult to see Chalco achieving profitability, or more importantly positive free cash flow, for the foreseeable future without more radical cost cutting and asset sales.

The reality is that Chalco has barely moved the needle in its much needed purging of inefficient refiners and smelters. Since 2013, the company has sold only about $ 3.6 billion of assets according to FactSet, mainly iron ore mines and aluminum fabrication assets to parent Chinalco. It more recently sold half of its stake in Jiaozuo Wanfang, a manufacturer of a variety of aluminum products. Bernstein argues the sale of the fabrication business was unfortunate as it would have been the one good place to invest due to the higher margins on offer from higher value-add production.

Chalco’s management has recognized the balance sheet needs a thorough cleanup at a time when the company is carrying total debt of USD24 billion. A warning in January of an annual loss of CNY16.3 billion for the 2014 financial year was partly attributable to asset write downs of CNY5.1 billion. The asset sales and write downs are encouraging because it acknowledges Chalco’s challenges but the efforts appear half-hearted when compared to the paring of assets among the mining industry’s heavyweights: BHP Billiton is spinning off South32, Glencore has curbed its Australian coal production by 15%, while PetroChina ( 857.HK ) ( PTR ) and Sinopec ( 386.HK ) ( SNP ) are shedding assets.

The cost of power is another pressing issue for the maker of a commodity known as ‘solid energy’. Lowering electricity costs are essential to bolstering the bottom line and the company has invested significantly in its own power generation capacity, but it remains at the mercy of the National Development and Reform Commission to drop power tariffs or for coal prices to fall further to reduce the cost of its own supply.

Given the challenges confronting Chalco, it is difficult to make a case for investing in the aluminum producer. Companies facing difficulties don’t necessarily make bad investments if the stock is cheap enough. Chalco’s Hong Kong-listed H shares are trading at two times book according to Bernstein, while the Shanghai-listed A shares fetch a jaw dropping five times book value. That’s a rich valuation for a company with a fragile balance sheet that is bleeding cash. Investors have arguably got too carried away with the excitement of reforms of China’s state owned enterprises, lower interest rates in China and the outperformance of aluminum relative to other commodities.

A look at other China-based metals and mining stocks serves to highlight the Chalco’s demanding valuations. While CITIC Limited ( 267.HK ) is not an aluminum producer, it is an unwieldy and negative free cash flow producing state owned conglomerate with mining and metal exposures. It trades at 0.9 times book value, a valuation that would seem more appropriate for Chalco.

China Hongqiao Group ( 1378.HK ), a private sector producer with a 28% operating margin and more reasonable leverage at 90% of net debt to shareholder equity, trades below book value. Chalco’s valuation compared to a more efficient competitor seems all the more bizarre given its negative margins and 208% net debt to shareholder equity. Meanwhile, Russia-based and Hong Kong-listed United Rusal ( 486.HK ) is also burdened with a lot of debt but at least it makes a profit and owns a stake in Norilsk Nickel, the world’s largest nickel producer.

While Chalco is being carried along by the bull run on China’s stock markets, fundamentals will have to reassert themselves at some point. Investors hoping for more stimulus to revive China’s economy should consider that given the focus on the environment, government stimulus is not going to be directed towards industries that are energy intensive and suffering overcapacity, both of which China’s aluminum industry qualifies under.

The commodity downturn is probably only midway through. While aluminum may continue to outperform, weak hands like Chalco will eventually be washed out.