Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc.

March 04, 2011 08:00 ET

ZPP Reports G3 Emissions Standard Fully Implemented

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 4, 2011) - Zongshen PEM Power Systems Inc. (TSX:ZPP) ("ZPP", or the "Company") is pleased to report that the Chinese central government has fully enacted the emissions standards set out in State Policy No. 3 ("G3") which bans the production and sale of motorcycles that do not meet this emissions standard.

G3, which replaced the emission standards set out in State Policy No. 2 ("G2"), was enacted by the Chinese government in two stages. Motorcycle manufacturers were only permitted to produce G3 compliant motorcycles from July 1, 2010 onwards, while dealers had until February 28, 2011 to sell pre-G3 motorcycles. After March 1, 2011 only G3 compliant motorcycles are eligible to be registered for a license plate and riders without a license plate face fines or risk suspension of driver license. ZPP anticipates enforcement of the standard in most of its markets, but in some areas such as the remote rural regions of China the enforcement may be less stringent.

ZPP's Proactive Approach to G3

ZPP's motorcycle business started making G3 conversion plans in 2006 and invested over $4.5M to upgrade its technology and production facilities to produce G3 motorcycles. As a result, ZPP's emissions compliant motorcycles perform better than the models they replace. Most of ZPP's competitors' products have difficulty maintaining performance when they convert their G2 bikes to meet G3 emission standards. Chinese consumers are increasingly demanding better performance and quality, so ZPP has been able to increase the average selling price of its G3 motorcycles compared to its previous products and also expects margins to improve.

The initial implementation of G3 caused an industry wide disruption. ZPP's motorcycle business' domestic sales volume in the third quarter of 2010 fell to 60,400 units, the lowest quarter in 3 years as ZPP dealers were concentrating on selling existing G2 inventory. The G3 impact eased in the fourth quarter of 2010 when domestic shipments rebounded by 31% to 79,300 units because some dealers were starting to stock new inventory to meet the continued strong demand for motorcycles. For the first two months of 2011, the end customer demand has remained strong, but domestic shipments to dealers for all motorcycle manufacturers including ZPP have decreased because dealers are focused on selling residual G2 inventory. The drop in domestic sales has partly been offset by increased exports and ZPP expects domestic volume to increase from March onwards when dealers may only sell G3 motorcycles.

Tremendous Market Opportunity

ZPP believes that G3 creates a tremendous market opportunity for ZPP and other large motorcycle manufacturers to increase market share because the legislation is accelerating the consolidation trend in the Chinese motorcycle industry. The Chinese motorcycle industry is large but highly fragmented. In 2010, approximately 130 motorcycle manufacturers sold 20 million motorcycles. About 40% of the total volume was produced by small-scale manufacturers that compete mainly on price. A large number of these smaller manufacturers are expected to exit the industry or be acquired by larger competitors because they lack the technology and capital to upgrade their motorcycle production facilities to meet G3 standards and market demands for performance and quality.

These changing industry dynamics benefit ZPP as it has the financial backing and manufacturing and distribution platform to fill the void left by exiting manufacturers. ZPP's growth strategy is two-fold. ZPP intends to pursue an acquisition strategy wherea cquisition targets will be companies that produce bikes that fit with ZPP's product offerings and/or have distribution channels that are complimentary to ZPP. The Company will also continue to work closely with its distributors to expand promotional activities and increase the level of distributor financing to support sales growth.

"G3 is a positive change catalyst in the Chinese motorcycle industry as it increases the product standard and forces the weaker companies to exit the industry. ZPP is well positioned to seize these new market growth opportunities because it has invested in product quality, distribution and operations. We expect to see significant growth as the motorcycle industry favors large manufacturers because there are very significant economies of scale," said Mr.Zuo Zongshen. "G3 was also a chance to showcase our industry leading R&D team. Through early preparation, creativity and hard-work, we developed G3 compliant motorcycles that perform better than the G2 predecessor bikes – a claim few of our competitors can make - this has helped solidify Zongshen as a brand that is synonymous with quality and innovation."

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.

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.

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
    VP of Business Development & Investor Relations
    (604) 687-7908
    Zongshen PEM Power Systems Inc.
    Frank Chen
    Chief Financial Officer
    (604) 687-7908
    (604) 677-7008 (FAX)