Zongshen PEM Power Systems Inc.: Master Zuo JV Launched

VANCOUVER, BC – May 5, 2011 – (Motor Sports Newswire) – Zongshen PEM Power Systems Inc. (“ZPP”, or the “Company”) (TSX:ZPP) is pleased to report that the Company together with its related company, Zongshen Power (“ZS Power”), has signed a definite agreement to create the Master Zuo Joint Venture (“Master Zuo”) a national chain of motorcycle service and general engine retail centers across China.

Master Zuo

Master Zuo will be a professionally managed chain of motorcycle repair and general engine retail shops in China. These shops will provide the warranty service for ZPP’s motorcycles and repair service for all motorcycle brands and sell motorcycle parts and general engines such as small power generators. The goal is to create approximately 4,000 Master Zuo outlets in 3 years across China.

China is the largest motorcycle market in the world where in 2010 approximately 20 million motorcycles were sold. Despite this large market, the current motorcycle aftersales industry is highly fragmented, comprised of many small and undercapitalized stores. This creates a significant market opportunity for ZPP to enhance the value of a Zongshen motorcycle as Master Zuo will be China’s first large scale, professionally managed chain of repair shops that will be capable of delivering high quality aftersales service.

Formation of Master Zuo

Master Zuo is currently a wholly-owned subsidiary of ZPP with RMB 4 million ($0.6 million) in net assets. ZS Power will invest RMB 16 million ($2.5 million) for 80% ownership of Master Zuo. ZPP will also contribute its domestic parts division into the Master Zuo which in fiscal 2010 generated RMB 70 million ($10.8 million) in sales, but lost RMB 5 million ($0.8M). ZS Power will also contribute its retail engine business, which generated RMB 450 million ($69.2 million) in revenues and made RMB 30 million ($4.6 million) in profits in fiscal 2010. Both ZPP and ZS Power will not be engaged in businesses that are in direct competition to Master Zuo. ZPP will exclusively sell its domestic parts to Master Zuo but the Company will retain its export parts and domestic parts sale to manufacturers business, which together generated revenues of RMB 100 million ($15 million) in year ended 2010. Master Zuo will provide free labor for ZPP’s motorcycle warranty. ZPP will also be able to leverage the local market research and branding because the Company will be allowed to set up motorcycle dealerships next to future Master Zuo stores.

Further Capital Increases

ZPP does not plan for additional cash contribution to the joint-venture at this stage. However, the ownership percentage of Master Zuo will adjust to according to subsequent capital contributions by either ZPP and ZS Power. After each capital investment by ZS Power, ZPP has up to 36 months to inject capital into Master Zuo to retain its current 20% ownership.

“Master Zuo is the perfect compliment to our motorcycle business and will tremendously increase the value of the Zongshen motorcycles. These stores will broaden the appeal of our motorcycles as access to quality aftersales service is always one of the key concerns of a motorcycle buyer. The motorcycle industry is undergoing a period of change where the outcome will favor larger motorcycle manufacturers and in particular companies that are able to offer customers better value. Collaborating with ZS Power allows ZPP to create a strong service network with minimal capital investment. ZPP also saves the administrative cost of running a domestic parts and service business that is losing money. This redirection of resources allows ZPP to focus on selling and making better motorcycles,” said Mr. Zuo Zongshen. “My start was in motorcycle and engine repair and Master Zuo is a return to our corporate origin and a natural extension of our motorcycle brand. We believe quality and innovation is ultimately what sets our motorcycles apart. Now through Master Zuo we are able to extend our commitment to quality after the bikes leave the dealerships.”

Details of Asset Contribution

ZPP ZS Power
Description $ $
Assets 0.6 2.5
Business Contribution Domestic Parts General Engine
Revenue 10.8 69.2
Profit (loss) (0.8) 4.6

(figures in million, based on fiscal 2010 unaudited results)

About Zongshen Power

Chongqing Zongshen Power Machinery Co., Ltd (“Zongshen Power” or “ZS Power”) is one of China’s largest manufacturer and marketers of engines for use in motorcycles, three-wheeled motorcycles, power generators, lawn movers and light marine vessels. In 2010, ZS Power shipped over 4.8 million engines and generated $610 million in revenue and profits of $65 million. Zongshen Power is trading on the Shenzhen stock exchange under the symbol: SZ001696 and currently has a $1.4 billion in market capitalization.

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.

SOURCE: Zongshen PEM Power Systems Inc.

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