We've seen in pre-Olympic footage in and around Beijing that China has some major industrial pollution issues. Does it have any good alt-energy companies at this point?

Certainly it does. JA Solar (JASO) is a Buy-rated stock under coverage. The company's bullishness is buoyed by strong global demand for its photovoltaic [PV, or solar power] cells.

Solar seems to be a bigger deal these days in many parts of the world, doesn't it?

The company has seven fully operational solar cell manufacturing lines with annual installed capacity of 175 MW [megawatts], with plans to expand its annual capacity to 425 MW by year-end 2008. The company's principal customers are solar module manufacturers, who assemble and integrate its products into modules and systems. It sells its products primarily to customers in China, as well as customers in Germany, Sweden, Spain, South Korea and the United States.

JA Solar's business strategy is to enter into long-term contracts with its customers. This resulted in 100% of JA Solar's output being sold at prices fixed beforehand. With its focus on R&D [research and development], JA Solar is consistently improving upon its cell conversion efficiency. It already achieved an average cell efficiency of 16.5% in the 1st quarter of 2008 is targeting 17% or above by the end of fiscal 2008.

Interesting. What other Chinese solar companies do you cover?

We have a Hold recommendation on Hoku Scientific's (HOKU) common stock, with a six-month target price of $4.75. This represents 8.0% upside potential.

Hoku Scientific's $1.7 billion of polysilicon order backlog for up to 10 years from four solar companies represents a great growth story. However, its polysilicon plant with the exit of Merrill Lynch is facing a capital crunch forcing the company to resort to earnings dilutive borrowings. Also, the facility will not be operational before 2009, and will achieve full capacity only in 2010.

Until then, the company will have to depend upon its PV system installation business. This, along with a diminishing significance of fuel cells, increasing O&M [operations and maintenance] expenses leading to higher cost structure, earnings dilutive stock issuance and a strong competitive challenge in the alternative energy industry may present material risks to the company.

But you consider the stock a Hold, not a Sell?

Although the company reported negative earnings for five quarters in a row, and is expected to remain unprofitable through fiscal 2009, HOKU's long-term future prospects still appear bright. As is the case with most stocks engaged in the volatile alternative energy space, HOKU's valuation is based entirely on future profitability potential. On the basis of relative price-to-sales, which varies within a very wide range for its industry peers, HOKU trades well within that range.

What other alt-energy plays in China can you tell us about?

I'll leave you with one more for the time being. China's biggest bio-diesel player, Gushan Environmental Energy (GU) is ramping up its production capacity in a big way. The company's proprietary technology allows it to use cheaper sources of raw material and have a lower cost structure than its peers. Looking ahead, escalating oil prices on account of lower fuel subsidies by the government, higher production and entry into the high margin chemical market should collectively generate significant earnings growth.

However, strong governmental control over diesel prices and rising Chinese inflation continue to weigh on the stock. Also, the expected entry of Malaysian biodiesel (derived from palm oil) firms into the Chinese market will heat up things for Gushan, which has hitherto been ruling the roost and facing only domestic competition. Accordingly, we initiated coverage of GU last month with a Hold recommendation and a six-month target price of $12.00.

Jon Kolb is a senior analyst covering the utilities and alternative energy industries for Zacks Equity Research.