Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc.

November 14, 2011 19:12 ET

ZPP Reports Financial Results for Third Quarter, 2011

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 14, 2011) - Zongshen PEM Power Systems Inc. ("ZPP" or the "Company") (TSX:ZPP) today announced its financial results for the three-month and nine-month periods ended September 30, 2011. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

Third Quarter, 2011(1)

Third quarter, year to date financial results

YTD 2011 YTD 2010
Revenue $ 211,885 $63,816
Cost of goods sold (191,402) (56,918)
Gross margin 20,483 6,898
Operating expenses (20,627) (8,611)
Impairment of goodwill and intangibles
Other income (expense) (5,721) 124
Tax recovery (expense) 4,872 (48)
Loss (64,311) (1,637)
Loss per share (0.65) (0.02)
Adjusted net income (loss)2 2,414 (1,120)
Adjusted EPS 0.02 (0.01)
EBITDA2 9,692 1,141
Units shipped 413,000 136,000

(numbers in 000's, except for earnings per share (EPS) and shipment number)

Quarterly financial results

Q3 2011 Q3 2010 Q2 2011
Revenue $ 79,862 $56,267 $62,740
Cost of goods sold (72,979) (50,142) (57,903)
Gross margin 6,883 6,125 4,837
Operating expenses (7,181) (5,917) (6,506)
Impairment of goodwill and intangibles (63,318) - -
Other income (expense) (5,184) 103 (886)
Tax recovery (expense) 5,197 (48) 247
Net (loss) income (63,603) 263 (2,308)
EPS (0.64) 0.00 (0.02)
Adjusted net income (loss)2 1,428 780 (830)
Adjusted EPS 0.01 0.01 (0.01)
EBITDA2 3,888 2,866 1,166
Units shipped 156,000 112,000 126,000

(numbers in 000's, except for earnings per share (EPS) and shipment number)

For the third quarter 2011, the Company generated revenues of $79.9 million and shipped 156,000 units of motorcycles and electrical two-wheelers which is an increase of 41.9% in revenue and 39.3% increase in shipments compared with third quarter, 2010. The loss for the third quarter 2011 loss was $63.6 million and the adjusted net income was $1.4 million and EBITDA ("earnings before interest, tax depreciation and amortization") was $3.9 million. The third quarter loss is primarily due to non-cash impairment charges of $63.3 million to goodwill and intangible assets recognized in the quarter. The net income in the third quarter, 2010 was $263,000 and EBITDA was $2.9 million.

For the nine months ended September 30, 2011, the Company generated $211.9 million in revenues, loss of $64.3 million, EBITDA of $9.7 million and a loss per share of $0.65. In the same period of 2010, Company's revenues were $63.8 million, loss of $1.6 million, EBITDA of $1.1 million and loss per share of $0.02. The increase in revenue, EBITDA and motorcycle shipments were due to the acquisition of the Motorcycle Business that was closed on July 2, 2010. The larger loss in 2011 is due to impairment charges to goodwill and intangible assets.

Excluding non-cash charges, such as impairment charges and amortization of intangible assets, the adjusted net income was $1.4 million and adjusted earning per shares was $0.01 for the third quarter 2011. In the third quarter, 2010, the adjusted net income and adjusted earnings per share was $780,000 and $0.01. The increase adjusted net income and EBITDA is due to higher shipment volumes.

Impairment of intangible assets and goodwill

Due to the challenging market conditions in the Chinese motorcycle industry brought on by an emission standard change and uneven enforcement of the standard, the Company revised its financial forecast, which formed the basis of the intangible assets valuation. As a result the Company performed a full impairment test on its long-lived assets and goodwill, which resulted in a non-cash net impairment charge of $15.5 million to intangible assets and $42.6 million to goodwill.

Update of Escrow Share

The total purchase price of the Motorcycle Business was $145.0 million of which the 34.8 million escrow shares were valued at $37.6 million. Under the HKVAS Agreement the 2011 net income of the Motorcycle Business must exceed at least 169% of the 2009 normalized income of the Motorcycle Business in order for the HKVAS to retain any of these escrow shares. The Company does not expect that this earnings target will be reached and consequently, these 34.8 million escrow shares will be cancelled on December 31, 2011.

Large Gas Bikes (above 50 cc motorcycles)

ZPP sold 147,700 motorcycles and generated $65.1 million in motorcycle sales for the third quarter of 2011, which is an increase of 42.7% and 43.0% from the third quarter, 2010.

Domestic Motorcycles

The total revenue for domestic motorcycle sales was $31.3 million and shipments were 65,200 in the third quarter 2011 which are respective increases of 13.1% and 8.7% compared with the third quarter 2010. The average sales price ("ASP") was $480 per motorcycle, an increase of 3.9% compared to third quarter 2010. Sales improved over same period prior year because motorcycle sales in the third quarter, 2010 was particularly affected by the implementation of a new motorcycle standard, set-out in Country Standard No. 3 ("G3") that became effective on July 2, 2010 for motorcycle manufacturers.

For the nine month period ended September 30, 2011, sales increased in the third quarter 2011 improved over second quarter 2011 because of local advertising initiatives such as the Company's recent Legendary Motorcycle Tour and closer collaboration with dealers which included increasing the credit limit to support their sales initiatives. Increased parts delivery in the third quarter 2011 also allowed the Company to deliver into the order backlog. In the prior quarters sales were partly disrupted by late parts delivery because of raw material, labor and electricity shortages that affected our key suppliers.

G3 – Emissions Update

Although domestic sales improved in the third quarter 2011, the Chinese domestic motorcycle market remains challenging for large manufacturers, including ZPP in the immediate term because the enforcement of G3 by the Chinese government has been uneven. Most large manufacturers like ZPP comply with the new emission standards while the compliance by smaller manufacturers has not been uniform and as a result have continued to produce lower priced, non-G3 motorcycles. Large manufacturers have been affected the most by G3 and in the first nine months of 2011, the top Chinese 13 manufacturers have seen domestic volume drop by 35% compared with the same period in prior year.

Export Sales

The total revenue for export sales was $33.8 million and export shipments totaled 82,500 units, respective increases of 89.6% and 89.7% over third quarter 2010. The ASP of export motorcycles was $409 in third quarter 2011, consistent with third quarter 2010. Export sales in 2011 has continued to improve as key export markets such as Brazil, Thailand and Southeast Asia enjoy strong economies and because the Company has increased marketing initiatives and introduced new motorcycle models in those markets.

Brazil continues to be one of ZPP's strongest markets in 2011 where the company sold a total of 50,000 bikes in the first nine months of 2011, doubling prior year's full year shipments. Brazil is a developing economy where like rural China, the motorcycle is a key mode of transportation. In 2010, an estimated 2 million motorcycles were sold in Brazil, primarily for commuting purposes. The Company's export initiatives in the fourth quarter will be to increase the level of advertising in Southeast Asia and South America.

Small Gas Bikes (50 cc or below gas motorcycles)

Small gas bikes sales were $2.1 million and shipments totaled 6,300 units for the third quarter of 2011, which represent revenue and volume increases of 34.4% and 31.3% from third quarter of 2010.

Electric Bikes

For the third quarter of 2011, the total revenue in the electric bikes were $1.3 million and shipment totaled 1,800 units which is a 17.1% decrease in revenue and a 43.8% decrease in volume compared with the third quarter of 2010 as the Company is focused on selling higher average sales price two-wheelers.

Third quarter 2011 marks the one-year anniversary of the launch of the Company's e-motorcycle, Toronto which was China's first e-motorcycle. Since the e-motorcycle's introduction, the Company has sold over 2,000 units at an average price of RMB 4,200 ($650) or 25% more than the average conventional gas bike.

In third quarter 2011, the Company introduced two additional e-motorcycles ZS-800D-2 and ZS-1000D-3 that can reach maximum speeds of 40km/hr and 60 km/hr respectively. ZS-800D-2 will sell for $380 excluding battery and $700 with a battery. The Company is providing the domestic dealers the option to purchase the electric two-wheelers without batteries to allow more customer flexibility. The ZS-1000D-3 is destined for export markets, primarily in Southeast Asia and the estimated price to the dealers is $750 including the battery.

The Company has also delivered a high-powered e-motorcycle that is capable of reaching 80km/hr to a select group of domestic and export dealers for pre-sale testing. This e-motorcycle will be sold in early 2012. The price for this e-motorcycle has not yet been determined.

The Company expects that the electric products to contribute to a larger part of the ZPP's overall business in the coming years. In the immediate term, the Company's e-motorcycle deliveries have been affected by unsteady supply of parts as the electric motorcycle supply network is in the developmental phase.

"Our export business continues to be strong and partially offsets slower the Chinese market which is going through a structural change. In light of this changing environment, ZPP will continue to enhance its ability to compete. For our gas motorcycle business, the focus will be to increase our brand image through advertising and promotional activities in our domestic and export markets. We will continue to strengthen our relationships with our dealers by extending their credit terms to support their sales initiatives. We reduced our product line from 90 to 70 models this year, which is a key milestone in our continuous effort to reduce product costs. In the meantime, we are improving the electric motorcycle technology with the goal of rolling out additional e-motorcycles because we believe electric transportation will lead the growth of the motorcycle industry," said Mr. Zuo Zongshen, CEO and Chairman of ZPP.

Earnings Call Details

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

Date: Tuesday, November 15, 2011 at 11 a.m. Eastern Time
Dial in number: 1-888-466-4587 (North America) or
1-719-325-2234 (International)
Live Webcast Link: http://viavid.net/dce.aspx?sid=00008F9E

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 nine months ended September 30, 2011 filed on SEDAR.

EBITDA is defined as Net Income adjusted for interest income/expenses, tax expenses/recovery, impairment charges, amortization & depreciation expenses and foreign exchange gain/loss.

Adjusted Net Income is defined as Net Income adjusted for amortization of fair value increments, impairment charges, foreign exchange gains/loss.

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, 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, and those disclosed under the heading "Risk Factors" in the Company's Management's Discussion and Analysis – Period Ended September 30, 2011" dated November 15, 2011 and filed SEDAR at www.sedar.com.

(1) Comparative results for 2010 were adjusted based on International Financial Reporting Standards ("IFRS").

(2) Computation for Adjusted net income (loss) and EBITDA are defined in Non-IFRS Performance Measures and fully described in the Company's interim Management's Discussion and Analysis for the three and nine months ended September 30, 2011 filed on SEDAR.

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

Contact Information

  • Zongshen PEM Power Systems Inc.
    Michael Cheung
    Chief Financial Officer
    (604) 687-7908
    (604) 677-7008 (FAX)