ZPP Reports Strong Revenue, Profit, and EBITDA Growth in the 4th Quarter of 2010

VANCOUVER, BRITISH COLUMBIA – March 31, 2011 – (Motor Sports Newswire) – Zongshen PEM Power Systems Inc. (“ZPP” or the “Company”) (TSX:ZPP) today announced its financial results for the three-month period ended and year ended December 31, 2010. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

Annual Results
2010 2009
$ $
Revenue 138,922,000 20,888,000
Gross margin 12.1% 7.9%
Net loss (77,000) (1,251,000)
Increase in cash 4,349,000 1,882,000
EPS (0.00) (0.02)
EBITDA 7,563,000 (1,271,000)
Units shipped 275,000 60,000

As previously disclosed, on July 2, 2010, ZPP closed the acquisition of one of China’s leading two-wheeled gas motorcycle companies (the “Motorcycle Business”) from Hong Kong VAS International Development Limited (“HKVAS”), an investment holding company that invests in tandem with, and is related to and controlled by the Company’s strategic partner and largest shareholder, Zongshen Industrial Group Co., Ltd. (“ZIG”).

Following the closing of the acquisition of the Motorcycle Business on July 2, 2010, the Company has become one of the major two-wheeled motorcycle manufacturers in China with over 2,800 employees and expanded product offerings of up to 250cc gas motorcycles. Accordingly, for the year ended December 31, 2010 which incorporates the third and fourth quarter financial results of the Motorcycle Business, ZPP generated revenues of $138.9 million, a net loss of $77,000, earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $7.6 million, compared to revenues of $20.9 million, net loss of $1.3 million and EBITDA of negative $1.3 million in the same period of 2009.

As required by generally accepted accounting principle (“GAAP”), the total purchase price of $145.0 million was allocated to the Net Assets, Intangible Assets and Goodwill. Newly acquired intangible assets were allocated $36.8 million and 2010 net of income tax amortization charges relating to these assets totaled $2.7 million. These amortization charges have no cash flow impact, but reduce GAAP net income by $2.7 million such that ZPP has reported a small loss for fiscal 2010. As such, excluding these amortization charges, Net Income would be $2.6 million and basic and fully diluted Earnings Per Share (“EPS”) would be $0.03 for the year ended December 31, 2010.

2010 Motorcycle Business Review (unconsolidated, for information only)
2010(1) 2009(1)
000’RMB 000’$ 000’RMB 000’$
Revenue 2,018,538 307,221 1,805,796 301,929
Cost of goods sold (1,736,020) (264,222) (1,568,945) (262,328)
Gross margin 282,518 42,999 236,851 39,601
Net Income 119,419 18,176 110,266 18,434
Units shipped 567,000 545,000

The Motorcycle Business grew in 2010 compared to 2009 despite a difficult domestic operating environment due to the enactment of a new emission standard. For the year ended 2010, revenue grew 1.8% to $307.2 million, unit shipments grew 4% to 567,000 gross margins improved by almost 1% to 14.0%. Increases in operating expenses in 2010 were consistent with increased revenue.

Update on Vendor Earn-out Agreement

The Motorcycle Business’ 2010 net income was RMB 119 million. This represents a 8% increase over the 2009 normalized net income of RMB 110 million. Under the HKVAS Earn-out Agreement, 2010 Motorcycle Business’s net income must exceed 120% of 2009 normalized net income in order for one-half of the total escrow shares of 34.8 million or 17.4 million shares to be released from escrow to HKVAS. Accordingly, no shares were released from escrow under the Earn-out Agreement. The HKVAS Earn-out agreement provides that 17.4 million escrow shares may be retained by HKVAS if the 2010 net income of the Motorcycle Business is least 120% of 2009 Net Income and if 2011 net income is least 144% of 2009 Net Income (the “2011 Target”). The Company intends to amend the HKVAS Earn-Out Agreement to provide for the release of 17.4 million escrow shares if the 2011 Target is met.

Fourth Quarter Results(2)
Q4 2010 Q3 2010 Q4 2009
$ $ $
Revenue $75,107 $56,267 $2,005
Cost of goods sold (65,235) (50,142) (1,802)
Gross margin 9,872 6,125 203
Net income (loss) 1,381 293 (4)
EPS 0.03 0.00 (0.00)
EBITDA 5,388 3,751 35
Units shipped 139,000 112,000 8,000
(numbers in 000’s, except for earnings per share (EPS) and shipment number)

In the fourth quarter of 2010, the Company shipped 139,000 units of motorcycles and ebikes and generated $75.1 million in revenues, Net income of $1.4 million and EBITDA of $5.4 million. This represents a 24% growth in shipments, and a 33% increase in revenue and a 44% increase in EBITDA and an almost five fold increase in net income compared to the third quarter 2010.

The fourth quarter revenue and profit growth was led by the improved domestic and export shipments of gas motorcycles:

Gas Motorcycle Business update

Domestic large gas bike sales in the fourth quarter of 2010 increased by 40% to $38.7 million and shipments increased 29% to 77,000, compared to the third quarter of 2010, as dealers were replenishing inventory to meet the continued strong end-customer demand. The average price of the motorcycles shipped increased by 8% to $500 because only the higher priced G3 motorcycles were sold in the quarter.

Sales in the third quarter and fourth quarter of 2010 were negatively impacted by the implementation of a new emissions standard set out in State Policy No. 3 (“G3”). Since July 1, 2010, motorcycle manufacturers were banned from producing non-compliant motorcycles while dealers had until February 28, 2011 to sell their remaining non-G3 motorcycles. Sales and margins were negatively affected in the short term as dealers were focused on selling G2 inventory. However, after the implementation and enforcement of G3, ZPP expects to capture market share as many of its competitors lack the resource to upgrade their facilities to produce G3 motorcycles.

Large gas bikes export revenues increased by 43% to $25.5 million and volume grew by 28% to 55,000 units in the fourth quarter of 2010 compared to the third quarter. The average price for the export units also increased 12% to approximately $460 per motorcycle due to more exports of higher end products and more export sales to Brazil which demands higher end products. For the 2010, total export volume of the Motorcycle Business was 32% of total shipments which is a return to historical export levels, from a low of 17% in 2009 during the financial crisis.

The remaining sales of $8.6 million, related to parts, engines and other products increased 14% from third quarter 2010.

Electric Two-Wheeler and Small Gas Motorcycle Update

Fourth Quarter 2010 & Fiscal 2010

Revenue in the fourth quarter 2010 increased 23% to $2.3 million and volume decreased 25% to 6,000 units compared to fourth quarter of 2009. The overall increase in average sales price was due to the Company’s focus on higher end products in domestic Chinese market as well as more exports to our European and Latin American markets, which demand premium products with higher prices than the Chinese market. For the full year of 2010, the small gas and e-bike business shipments decreased 36% to 38,000, and revenues decreased by 40% to $8.3 million compared with the full year of 2009, as the division is focusing its resources on developing and marketing its new e-motorcycle products. The Company believes that it is the first Chinese company to develop an e-motorcycle for the Chinese market, and that it can be a leader in the China market for this premium electric product as it works with distributors to build market acceptance.

During the fourth quarter, ZPP also optimized its supply chain and production to prepare a wider launch of the Toronto e-motorcycle. The Toronto which was launched in fall of 2010 is China’s first e-motorcycle, performs like a 110-120 cc gas motorcycle, but because the bike is battery powered, its operating costs are 1/10th of a similar powered gas motorcycle. This significant operating cost advantage and the Chinese government support for electric vehicles are among the reasons industry analysts are forecasting an acceleration of growth of e-motorcycles in the next five years.

The Toronto e-motorcycle has continued to gain customer acceptance since its introduction in mid-September 2010. As of March 15, 2011 the Company has now sold over 600 units at an average price of RMB 4,100 – RMB 4,300 ($610-$630) which is more than twice that the price of a domestic e-bike and roughly 25% or $130 more than the average price of a domestic gas motorcycle.

Outlook

The Company’s fiscal 2011 consolidated financial statements will incorporate the full year financial results of the Gas Motorcycle business, which in 2010 generated $307.2 million in revenue and $18.2 million in profits. As the acquisition was completed on July 2, 2010, only the third and fourth quarter financial results of the Motorcycle Business were included in the 2010 financial results. The Company expects 2011 to be profitable and EBITDA positive on a consolidated basis.

ZPP is also considering to increase market share through acquisitions. The consolidating Chinese motorcycle industry spurred on by G3 implementation is expected to lead to acquisition opportunities. Potential targets are expected to include companies that have unique products or have complimentary distribution channels.

Gas Motorcycle Business

The sales volumes in the first quarter and part of the second quarter of 2011 are expected to be affected by the transition from G2 to G3 emission standards but Company expects gas motorcycle sales to improve starting in the second half of 2011.

The Company will also invest more on advertising and branding with a particular emphasis on a China wide advertising and promotion campaign. This concerted advertising strategy together with ZPP’s strong product suite and industry consolidation driven by the implementation of G3 is expected to result in revenue and profit growth in 2012 and beyond.

The Company will continue to introduce new products, but plans for a net reduction of the total motorcycle models in 2011 and 2012. The product line rationalization is expected to be positive on gross margin due to economies of scales in production and supply purchases.

Electric Two-Wheeler and Small Gas Motorcycle Business

The loss for the electrical two-wheeler and gas motorcycle business is expected to be lower in 2011 compared with 2010. Although the Company plans to introduce a new and higher performing e-motorcycle in the third quarter of 2011, the incremental advertising and R&D costs with launching this e-motorcycle is expected to be less than the costs of introducing the Toronto.

“2010 was a pivotal year for ZPP. As a result of the Motorcycle Business acquisition ZPP significantly expanded in size and scope and the Company is now one of China’s largest motorcycle companies recognized for its high quality products, established brands and large domestic and international distribution networks,” said Mr. Zuo Zongshen, CEO and Chairman of ZPP, “Despite the G3 enactment which caused an industry disruption, our Motorcycle Business’s revenue continued to grow and remain cash flow positive for the year which is a testament to our strong management team, robust brand, strong product and operations platform. Now these competitive strengths will allow us to seize the tremendous market growth opportunities. Our industry leading products will help ZPP to capture market share as competitors exit the industry. We also look to accelerate market share growth through acquisitions and will be particularly interested in companies that have unique products or complimentary distribution channels to ZPP.

“This year we also led the industry by introducing China’s first e-motorcycle capable of matching the performance of a 110 to 120 cc gas motorcycles,” continued Mr. Zuo Zongshen, CEO and Chairman of ZPP. “Toronto is the first of many high performance e-motorcycles that ZPP will launch in the coming years. In addition to having the first mover advantage in a fast growing electrical two-wheeler market, ZPP will now also have access to the gas motorcycle’s broad domestic and international sales network to maximize the Toronto’s visibility and availability. The sales rebound in fourth quarter and increased sales of Toronto gives us confidence going into 2011. While we expect both our businesses to grow we will work to manage higher input cost and to continue our commitment to invest in our brand and product development to built shareholder value for the long term.”

Earnings Call Details

ZPP will host a conference call to discuss the fourth quarter and annual results and answer questions. Please see details below:

Date: Thursday April 1, 2011 10:00 a.m. Eastern Daylight Time (EDT)
Dial in number: 1-888-299-7209 (North America) or 1-719-325-2473 (International)
Live Webcast Link: http://viavid.net/dce.aspx?sid=00008372

About Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc. is a public company trading under the symbol ZPP on the Toronto Stock Exchange. The Company manufactures gas motorcycles, electric motorcycles, electric bicycles and other e-vehicles in China for the Chinese domestic and international markets. Zongshen PEM Power System’s largest shareholder is Zongshen Industrial Group, one of China’s largest manufacturers and distributors of engines and power equipment.

Non-GAAP Performance Measure

The Company discloses that EBITDA is not a recognized measure under the Canadian generally accepted accounting principles (“GAAP”) and should not be considered more meaningful than measures determined under GAAP. Readers should be cautioned that this non-GAAP measure should not be construed as an alternative to other measures of financial performance as determined in accordance with GAAP and may not be directly comparative to measures for other companies where similar terminology is used. The methods of computation of this non-GAAP measure can be found in the Company’s annual Management’s Discussion and Analysis for the three months and year ended December 31, 2010 filed on SEDAR.

(1) The Company earns most of its revenue and pays most expenses in Chinese Yuan (RMB). The Company reports in Canadian dollars which strengthened against the Chinese Yuan in fiscal 2010 by 9.3% from prior year. As such, if the currency was held constant, the Motorcycle Business’ revenue increased 11.8% to RMB 2.018 billion and profit increased by 8% to RMB 119.4 million in 2010 compared with 2009. 2009 Net Income for the Motorcycle Business included approximately $2 million of one time asset disposal gain which was excluded from the calculation of the 2009 Normalized Net Income. For more information refer to December 31, 2010 Management Discussions & Analysis.

(2) The Motorcycle Business was a private company prior to the acquisition by the ZPP and only prepared annual financial statements. As such, comparative discussions are on the third and fourth quarter of 2010.

Forward-looking Information

This Press Release contains “forward-looking information” that is based on ZPP’s expectations, estimates and projections as of the dates which those statements were made. This forward-looking information includes, among other things, statements with respect to the Company’s expectation of the Chinese government policies, future sales volume, margins and performance of the Company’s gas motorcycle business and future prices and margins of the Company’s electric motorcycles in China. There can be no assurance that such statements will prove accurate. Such statements are necessarily based on a number of estimates and assumptions that are subject to numerous risks and uncertainties that could cause actual results and future events to differ materially from those anticipated or projected. ZPP disclaims any intention or obligation to revise or update such statements. The following factors, among others, could cause actual results or developments to differ materially from the results or developments expressed or implied by forward-looking statements: uncertainties associated with the policies of the Chinese government, in particular, the enforcement of the G3 standard by the Chinese government to ban G2 production by manufacturers and ban sales of G2 motorcycles by dealers and distributors; uncertainties associated with the sales volume and margins for the Company’s gas motorcycles; uncertainties related to the market supply and demand of electric motorcycles; risks associated with the fluctuations in cost of operating the Company’s gas and electric motorcycle businesses; uncertainties associated with the current and future operating parameters of the Company’s gas and electric motorcycle businesses; and risks associated with the Company’s development and maintenance of its proprietary technologies. All forward‐looking statements in this Press Release are based on management’s reasonable beliefs, intentions, and expectations with respect to future events and are subject to certain risks, uncertainties, and assumptions as of the date of this release. Some of these risks, uncertainties and factors include those disclosed herein under “Risks Factors”, those disclosed under the heading “Risks Associated with the Company following the Completion of the Proposed Transaction” in the Company’s Information Circular dated May 10, 2010 and filed on SEDAR at www.sedar.com and those disclosed under the heading “Risk Factors” in the Company’s Annual Information Form dated March 31, 2010 and filed on SEDAR at www.sedar.com.

The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

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