As both the largest consumer of energy and the largest emitter of pollution in the world, China’s focus on renewable energy solutions shouldn’t come as any surprise. Solar companies in particular have rallied significantly over the past month, but still trade at an average price-earnings multiple of just 12.5x, suggesting to some analysts that more upside may be in the cards.
Companies like Solarfun Power Holdings Co., Ltd. (SOLF) have jumped more than 130% over the past year, while others like ReneSola Ltd. (SOL) and JA Solar Holdings Co., Ltd. (JASO) aren’t far behind with their stocks moving up 118% and 94%, respectively. But while the sector as a whole has beat the S&P 500 by an impressive 22.9% over the past month, the index is still down 66.6% since January of 2008.
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The combination of the low valuation given to the sector and the fact that it remains down over the longer term has led many analysts to remain bullish, despite Eurozone fears, weak solar financing, and reductions in German feed-in tariffs that all could limit demand. Meanwhile, a recent report by the IMF helped to allay these concerns by revising its 2010 economic growth estimate upwards to 4.6%.
Finally, further bullishness is being driven by potential reductions in tariffs for the sector. Xinhua News Agency reported earlier this week, citing Liu Qi, a deputy director at the National Energy Administration, that solar power tariffs may fall to between 0.6 yuan and 0.8 yuan per kilowatt hour by 2020, while its solar output capacity may rise to 20 gigawatts from about 5 gigawatts expected by 2015.
But despite the optimism, there are some risks that the industry may face moving forward. While the euro has stabilized in recent weeks, some analysts view it as likely to post further losses against the dollar and yen, which may result in lower revenues for solar companies earning the currency. Meanwhile, the global economic environment remains far from certain, despite IMF comments.
In the end, China’s solar sector remains relatively cheap based on historical standards, despite its recent move higher. But, further upside may depend on the robustness of the global economic rebound and the euro’s fate against other currencies like the dollar and yen.







