Zongshen PEM Power Systems Inc. Announces Second Quarter 2008 Financial Results

08:00 EDT Thursday, August 28, 2008

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    -   Revenues increase 321 percent year-over-year to $7.1 million
    -   Gross margin increases to record level at 16 percent
    -   Average selling price per unit increases to $310
    -   Earnings per share amounts to $0.01

    TSX Venture Exchange: ZPP
    >>

VANCOUVER, Aug. 28 /CNW/ - Zongshen PEM Power Systems Inc. ("ZPP" or "the Company") (TSXV:ZPP), today announced its financial results for the three-month period ended June 30, 2008. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise. The second quarter represent the seasonally second weakest quarter of the year due to the effect of consumer purchasing patterns.

For the three-month period ended June 30, 2008 the Company reported revenues of $7.1 million versus $1.7 million in the corresponding quarter last year, representing a 321 percent growth rate. Volume sales during the second quarter of 2008 totalled 22,715 units, compared with 5,896 units in the second quarter of 2007. Net income during the quarter amounted to $673,777 or $0.01 per share, versus a net loss of $360,453 or $0.01 per share during the second quarter of 2007.

Operating income (non GAAP measure), excluding the impact of stock based compensation, amortization, interest income and foreign exchange gain amounted to a record $463,964 during the second quarter.

E-bike sales during the quarter were disappointing as it has taken longer than anticipated to expand the Company's e-bike business. The Company has identified issues related to its distribution channels and production and has implemented a plan to correct them. Due to the lower power and shorter range, e-bikes are mostly found in urban areas. In addition, new gas bikes are banned in many cities in China. Part of the Company's distribution strategy is to make use of Zongshen Industrial Group's gas bike distribution network in China. While Zongshen Industrial Group has 5,000 distributors in China, many of them are located in the rural areas and need more education on e-bikes to generate high volume sales. In addition, ZPP and Zongshen Industrial Group are working to convince some dealers to open dealerships in the respective urban markets where they would attract and target the appropriate buyers. ZPP also experienced delays in production of premium model e-bikes due to the lack of supply of a key part for the power control system, which has now been resolved through a new relationship. In addition to developing the Zongshen Industrial Group distribution channel, the Company is developing pure e-bike distribution channels that currently serve the large Chinese e-bike market and is considering the acquisition of e-bike companies which have good distribution networks.

At June 30, 2008, the Company had cash and short-term deposits including the short-term deposit with Zongshen Industrial Group totalled $38.9 million, compared to $36.5 million at December 31, 2007.

During the second quarter, the Company sold 22,715 units consisting of 1,185 e-bikes, 10,654 small gas bikes and 11,106 complete knock down (CKD) small gas and electric bike kits. These sales were achieved through distribution to more than 1,500 distributors and dealers. All products being sold were manufactured at ZPP's Wuxi plant, where total capacity for the Company's e-bikes is approximately 200,000 units per annum on a two-shift basis.

The Company's growth plan includes the sales to international markets. During the second quarter, $4.1 million or 58 percent of revenues were generated from export sales.

"We continue to see strong demand and enthusiasm for our premium electric bike product line from dealers and distributors," noted Zongshen Zuo, Chairman and CEO of Zongshen PEM Power Systems Inc. "We have been successful in achieving higher average selling prices and increasing gross margins. Our focus for the remainder of 2008 will be to educate the consumer market in the benefits of ZPP's premium e-bikes which I expect will represent a significant portion of our revenues in 2009."

During the second quarter, the Company commenced the construction of its Chongqing production facility, which is expected to be operational in early 2009. The new production facility has been designed such that it will have an initial annual production capacity for 600,000 bikes (phase 1) and expandable to have four production lines with a total production capacity of 1.2 million units (phase 2). The capital cost budget for phase 1 is $8 million and the expansion for phase 2 will be an incremental $1.5 million. Since the land use rights associated with the new plant are to be acquired from Zongshen Industrial Group, a related party, the Company engaged an independent third party to conduct a valuation. Subsequent to quarter end, ZPP received the valuation report and it supports the purchase price of $1.8 million for the land use right.

ZPP will continue to leverage the resources of its major shareholder, Zongshen Industrial Group, to become a leading provider of alternate power systems and products, including low-emission and electric vehicles, fuel cells, batteries and solar power products. ZPP's growth will continue to be supported by its major shareholder, Zongshen Group, one of China's largest manufacturers of automotive engines, industrial motors and vehicles. ZPP is the platform through which Zongshen Group will undertake mass-market entry of the alternate power systems and products. The Company is able to access and lever off the resources of Zongshen Group, including its brand name, research and development, product design and development, production, marketing and distribution network.