Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc.

August 13, 2011 00:29 ET

ZPP Reports Financial Results for Second Quarter, 2011

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 13, 2011) - Zongshen PEM Power Systems Inc. (TSX:ZPP) ("ZPP" or the "Company"), today announced its financial results for the three-month and six month periods ended June 30, 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 expanded product offerings of up to 250cc gas bikes.

Second Quarter, 2011(1)

Second quarter, 2011 year to date financial results

Jan 1 – Jun 30, 2011 Jan 1 – Jun 30, 2010
Revenue $ 132,024 $ 7,548
Cost of goods sold (118,424 ) (6,776 )
Gross margin 13,600 772
Operating expenses (13,446 ) (2,694 )
Other income (expense) (537 ) 21
Taxes recovery (expense) (325 ) -
Net profit (loss) (708 ) (1,901 )
Loss per share (0.01 ) (0.03 )
Adjusted net income (loss) 1,678 (1,901 )
Adjusted EPS 0.02 (0.03 )
EBITDA 6,495 (1,727 )
Units shipped 257,000 25,000

Second quarter, 2011 quarterly financial results

Q2 2011 Q1 2011 Q2 2010
Revenue $ 62,740 $ 69,284 $ 4,021
Cost of goods sold (57,903 ) (60,522 ) (3,665 )
Gross margin 4,837 8,762 356
Operating expenses (6,506 ) (6,939 ) (1,656 )
Other income (expense) (886 ) 350 13
Taxes recovery (expense) 247 (572 ) -
Net profit (loss) (2,308 ) 1,601 (1,287 )
EPS (0.02 ) 0.02 (0.02 )
Adjusted net income (loss) (1,118 ) 2,797 (1,287 )
Adjusted EPS (0.01 ) 0.03 (0.02 )
EBITDA 878 5,619 (1,202 )
Units shipped 126,000 131,000 14,000
(numbers in 000's, except for earnings per share (E) and shipment number)
(1) Comparative results for 2010 were adjusted based on International Financial Reporting Standards ("IFRS"). ZPP were only in 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 second quarter, 2011 and first quarter, 2011.

The Company generated $132.0 million in revenues, loss of $0.7 million, earnings before interest tax depreciation and amortization ("EBITDA") of $6.5 million and a loss per share of $0.01 in the six-month period ended June 30, 2011. In the same period of 2010, Company's revenues were $7.5 million, loss of $1.9 million, negative EBITDA of $1.7 million and loss per share of $0.03. The increase in revenue, EBITDA and lower loss is primarily due to the acquisition of the Motorcycle Business that was closed on July 2, 2010. The Motorcycle Business was a private company before the acquisition and did not prepare quarterly financial statements before the acquisition. As such, comparative discussions are between second and first quarter, 2011.

For the second quarter 2011, the Company generated revenues of $62.7 million and shipped 125,800 units of motorcycles and electrical two-wheelers which is a decrease of 9.5% in revenue and 4.2% decrease in shipments compared with first quarter of 2011. The Company's second quarter loss was $2.3 million and EBITDA was $0.9 million compared with first quarter 2011 net profit of $1.6 million and EBITDA of $5.6 million. The loss in the second quarter 2011 is primarily due to lower shipments of large gas motorcycles (above 50 cc). For the quarter, the revenue components were 83.8% large gas bikes (above 50 cc), 3.6% small gas bikes (50 cc and below), and 12.6% electric two-wheelers, parts and other sales.

Included in the net income (loss) is an amortization charge related to the intangible assets related fair value allocation of the Motorcycle Business acquisition of $1.2 million per quarter for the first and second quarters of 2011. These charges have no cash flow impact as such, excluding these amortization charges, Adjusted Net Income would be $1.7 million and Adjusted EPS would have been $0.02 for the six month period ended June 30, 2011 while the Adjusted Loss would be $1.1 million and Adjusted loss per share would have been $0.01 for the quarter ended June 30, 2011.

Large Gas Bikes

ZPP sold 117,300 motorcycles and generated $52.6 million in motorcycle sales for the second quarter, which is a decrease of 6.5% and 12.7% from first quarter of 2011. The domestic and exports shipments were respectively 43.1% and 56.9% of total shipments for the quarter.

Domestic motorcycles

The total revenue for domestic motorcycle was $23.4 million and shipments were 50,600 motorcycles in the second quarter 2011, respective decreases of 34.5% and 29.8% from the first quarter of 2011. The average sales price ("ASP") was $462 per motorcycle, a decrease of 6.9% compared to first quarter 2011 as more lower-end motorcycles were sold in the second quarter. Overall domestic sales decreased as second quarter is a seasonally slow quarters for motorcycle sales in China and because the Chinese motorcycle industry, in particular large motorcycle manufacturers such as ZPP, continue to face a changing operating environment brought on by uneven compliance and enforcement of a new emissions standard set out in Country Standard No. III ("G3") that was implemented on March 1, 2011.

New Emissions Standard Creates Market Share Growth Opportunities

ZPP expects to increase market share when the G3 emission standard is fully complied and enforced. In the immediate term, the compliance and enforcement has been uneven at the manufacturer level. Most large manufacturers like ZPP comply with the new emissions standards while the compliance and enforcement of the standard amongst smaller manufacturers has been uneven.

Over the longer term when the compliance and enforcement is in full effect, 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. Furthermore, 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, which as a result have a higher average sales price than the non-G3 compliant motorcycles.

Export Sales

The total revenue for export motorcycles was $29.2 million and export shipments totaled 66,700 units, an increase of 19.1% and 24.8% compared to the first quarter 2011. The ASP was at $437 in second quarter of 2011, a decrease of 4.6% as there were more exports of lower priced models.

Export sales continued to be strong in Brazil, Thailand and Southeast Asia as these markets have strong local economies and a result of marketing initiatives.

Management Agreement with Thailand JV

On May 10, 2011, the Company signed a management services agreement with ZIG's motorcycle joint venture in Thailand ("Thailand JV"). ZPP will receive the greater of RMB 1,000,000 (approximately $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/year.

Small Gas Bikes

Small gas bikes sales were $2.3 million and shipments totaled 7,000 units for the second quarter of 2011, which represent revenue and volume decrease of 27.2% and 32.2% from second quarter of 2010. On a sequential basis, this is an increase of 41.9% and 40.4% compared with the first quarter of 2011 as small gas motorcycle sales are typically stronger in the second quarter compared with first quarter and as some customers are favoring small gas bikes because of high gas prices.

Electric Bikes

For the second quarter of 2011, the total revenue in the electric bikes were $0.6 million and shipment totaled 1,500 units which is a 16.1% decrease in revenue but a 62.6% decrease in volume compared with the second quarter of 2010 as the Company is focused on selling higher average sales price two-wheelers. On a sequential basis, the revenue and shipment of e-bikes for the second quarter is an increase of 69.0% and 76.4% compared with the first quarter of 2011.

The Company electric motorcycle, Toronto which is China's first e-motorcycle has continued to gained traction because it offers customers a significant operating cost savings advantage. The Toronto performs like a 110cc gas motorcycle which is amongst the most commonly purchased motorcycle size in China, but because it is battery powered, operating costs are estimated at 1/10th of a similar gas powered motorcycle. During the second quarter, 400 units Torontos were sold and as of August 1, 2011, the Company has sold over 1,250 units since the product launch in September, 2010 at an average price of RMB 4,200 ($640). The Company will introduce a new and more powerful e-motorcycle in the third quarter of this year with an estimated sales price of RMB 6,000 ($920).

"The growth in our export markets and continued progress of our electric business highlights our second quarter. We have seen export sales to continue to improve as our key markets are enjoying strong economies and we are seeing the results of our marketing initiatives. We are also pleased with the progress of our electrical business which we expect to be a bigger part of our Company going forward as we are going to introduce additional e-motorcycles to our product suite." Said Mr. Zuo Zongshen. "Although the Chinese motorcycle industry is going through a structural change because of G3, we remain confident of the Chinese market. Motorcycles are and will continue to be a key transportation tool as they are a reliable and affordable means of transportation for a significant portion of the Chinese population. When G3 is enforced and complied with, we will be ready to realize the growth opportunities because ZPP has invested in product quality, distribution network and brand."

Earnings Call Details

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

Date: Monday August 15, 2011 11:00 AM Eastern Daylight Time (EDT)

Dial in number: 1-888-857-6930 (North America) and 1-719-325-2133 (International)

Live Webcast Link: http://viavid.net/dce.aspx?sid=00008B5C

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 and six months ended June 30, 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 26, 2011 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.

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