ZPP Reports Profit and EBITDA Growth in the First Quarter, 2011

VANCOUVER, BC – June 10, 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 March 31, 2011. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

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 bikes.

First Quarter, 2011(1)
Q1 2011 Q4 2010 Q1 2010
$ $ $
Revenue $ 69,284 $ 75,107 $ 3,527
Cost of goods sold (60,522 ) (65,235 ) (3,111 )
Gross margin 8,762 9,872 416
Net income (loss) 1,601 1,367 (614 )
EPS 0.02 0.01 (0.01 )
EBITDA 5,619 5,374 (524 )
Adjusted Net Income (Loss) 2,797 2,434 (614 )
Adjusted EPS 0.03 0.02 (0.01 )
Units shipped 131,000 139,000 10,000
(numbers in 000’s, except for earnings per share (EPS), adjusted EPS and shipment number)
(1) Comparative results for 2010 were adjusted based on International Financial Reporting Standards (“IFRS”). ZPP only had the e-bike and small gas bike businesses in first and second quarter of 2010. The Motorcycle Business was a private company prior to the acquisition by ZPP and only prepared annual financial statements. As such, comparative discussions of the large gas bike business are on the fourth quarter of 2010 and first quarter of 2011.

The Company’s first quarter, 2011 net profit was $1.6 million and earnings before interest tax depreciation and amortization (“EBITDA”) was $5.6 million representing an increase of 17% and 5% respectively compared with fourth quarter of 2010. The Company generated revenues of $69.3 million and shipped 131,000 units of motorcycles and electrical two-wheelers in the first quarter of 2011 which is a decrease of 7.7% in revenue and 5.8% decrease in shipments compared with fourth quarter, 2010. The increase in 2011 first quarter net profit and EBITDA is mainly due to lower distribution expenses and administrative expenses compared with fourth quarter 2010. Revenue components were 86.8% large gas bikes (above 50 cc), 2.3% small gas bikes (50 cc and below), and 10.9% electric two-wheelers, parts and other sales.

Included in the net income for the first quarter of 2011 is an amortization charge related to the intangible assets related fair value allocation of the Motorcycle Business acquisition of $1.2 million. These charges have no cash flow impact as such, excluding these amortization charges, Adjusted Net Income would be $2.8 million and Adjusted Basic and Diluted EPS would have been $0.03 for the quarter ended March 31, 2011.

Large Gas Bikes

ZPP sold 125,600 motorcycles and generated $60.2 million in motorcycle sales for the first quarter of 2011, which is a decrease of 5.4% and 6.2% from fourth quarter of 2010. The domestic and exports shipments were respectively 57.4% and 42.6% of total shipments which is similar to the fourth quarter 2010 domestic-export proportions.

Domestic motorcycles

The total revenue for domestic motorcycle was $35.7 million and shipments were 72,100 motorcycles in the first quarter of 2011, respective decreases of 7.8% and 6.7% from the fourth quarter of 2010. The average sales price (“ASP”) was $500 per motorcycle, consistent with fourth quarter of 2010. Sales decreased because ZPP dealers were focused on selling residual motorcycle inventory in advance of the full implementation of a stricter emissions standard on starting February 28, 2011. As a result, March shipments improved to 32,800 units compared with the combined January and February shipments of 39,300 motorcycles. However, initial enforcement of the new emissions standard has not been uniform, especially in the remote rural regions of China. If the standard is not strongly enforced, some competitors could continue to produce motorcycles that do not comply with the stricter emissions standard and take away sales of emissions compliant bikes.

New Emissions Standard Creates Market Share Growth Opportunities

ZPP expects to increase market share as a result of the full implementation of a new emissions standard. The industry changing emissions standard was implemented in two phases. Starting July 1, 2010 motorcycle manufacturers were not permitted to produce motorcycles that did not meet this new emissions standard while dealers were granted eight more months till February 28, 2011 to sell motorcycles built under the old emissions regime. During the initial implementation phases of this new emission standard, industry and Company sales decreased as dealers were focused on selling existing inventory. However, over the longer term, the Company expects this emissions standard to create significant market share growth opportunities as many of the smaller manufacturers which together account for 50% of total industry volume, lack the necessary capital and technical expertise to upgrade their facilities to produce emissions-compliant motorcycles and as a result, will either exit the industry or be acquired by larger competitors. The Company’s emission compliant motorcycles also perform better than the products built under the old standard while most competing offerings have difficulty maintaining performance after the emissions conversion. As a result, the ASP of the ZPP’s motorcycles for the first quarter of 2011 and fourth quarter of 2010 increased by 8% to $500 compared with the ASP in the third quarter, 2010 which was before the standard was fully implemented.

Export Sales

The total revenue for export motorcycles was $24.5 million and export shipments totaled 53,500, a decrease of 3.5% and 3.4% compared to the fourth quarter of 2010. The ASP remained at $460 in first quarter 2011, consistent with fourth quarter, 2010. During the first quarter, ZPP successfully secured distributors in Kenya, Cameron, Morocco, Tunisia, Egypt, and Mongolia, new markets targeted for 2011 and has begun selling in these markets.

Management Agreement with Thailand JV

Subsequent to the quarter and as previously disclosed, the Company signed a management services agreement with ZIG’s motorcycle joint venture in Thailand (“Thailand JV”). ZPP will receive the greater of $150,000 per annum or 30% of the net increase in profits over 2010 profits for managing this joint venture. ZPP expects market share growth opportunities in Thailand because the Company is able to offer affordable and quality bikes, which represent a viable alternative to the more expensive Japanese brands that currently occupy most Thai market that is estimated at 1.6 million units per year.

Small gas bikes

Small gas bikes sales were $1.6 million and shipments totaled 5,000 units, which represent revenue and volume decreases of 50% from first quarter of 2010. Small gas bikes are also affected by the emissions standard change as described above. On a sequential basis, this is a decrease of 10.3% and 3.8% in sales and in shipments, respectively, compared with the fourth quarter of 2010.

Electric two-wheelers

For the first quarter of 2011, the total revenue in the e-bikes was $348,000 and shipment totaled 840 units which is a 280% increase in revenue and 370% increase in volume compared with the first quarter of 2010. On a sequential basis, the revenue and shipment of e-bikes for the first quarter is a decrease of 32.3% and 25.4% compared with the fourth quarter of 2010.

The Company introduced China’s first electric motorcycle, Toronto, in the fall of 2010. This new motorcycle operates comparably to 110-120 cc gas bike but because it is electric powered, its operating costs are 1/10th of a similar powered gas bike. In the first quarter of 2011, 50∩╝à of electric two-wheeler sales were the Toronto e-bike and the remaining 400 are the electric scooters and e-bikes. As of the end of May, 2011, the company has sold over 900 Toronto e-bikes.

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 at least 120% of 2009 Net Income and if 2011 net income is at 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.

“The new emissions standard for gas motorcycles is now fully implemented as of February 28, 2011 and ZPP has seen its motorcycle sales and shipments improved in March as a result. Although this emissions standard change has caused an industry wide disruption and enforcement of the emissions standard will be uneven in the immediate term, we believe ZPP will ultimately benefit from higher product standards as we have prepared early to meet the higher emissions requirements and invested in product technology and quality. We look forward to some of the organic and external growth opportunities that are now available to us,” said Mr. Zuo Zongshen, CEO and Chairman of ZPP. “Our export markets has continued to be strong, highlighted by the Company entering six new markets in this quarter. We will continue to advance our export initiative and in particular, expand from OEM manufacturing to selling more Zongshen branded motorcycles abroad.”

Earnings Call Details

ZPP will host a conference call to discuss the first quarter, 2011 results and answer questions. Please see details below:

Date: Monday June 13, 2011 11:00 a.m. Eastern Daylight Time (EDT)
Dial in number: 1-888-510-1799 (North America) or 1-719-785-9448 (International)
Live Webcast Link: http://viavid.net/dce.aspx?sid=000087E2

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-IFRS Performance Measure

The Company discloses that EBITDA and Adjusted Net Income are not recognized measures under the International Financial Reporting Standards (“IFRS”) and should not be considered more meaningful than measures determined under IFRS. Readers should be cautioned that these non-IFRS measures should not be construed as an alternative to other measures of financial performance as determined in accordance with IFRS and may not be directly comparative to measures for other companies where similar terminology is used. The methods of computation of these non-IFRS measures can be found in the Company’s interim Management’s Discussion and Analysis for the three months ended March 31, 2011 filed on SEDAR.

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 30, 2011 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 the release.