Zongshen PEM Power Systems Inc.
TSX : ZPP

Zongshen PEM Power Systems Inc.

August 14, 2012 18:23 ET

ZPP Reports Second Quarter 2012 Financial Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 14, 2012) - Zongshen PEM Power Systems Inc. (TSX:ZPP) ("ZPP" or the "Company"), today announced its financial results for the three and six-month period ended June 30, 2012. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

The Company generated $52.1 million in revenues, shipped 95,600 motorcycles and electric two-wheelers and lost $467,000 in the second quarter of 2012. The Earnings before Interest, Taxes, and Depreciation & Amortization ("EBITDA") was $3.3 million while adjusted net income was $1.9 million. Second quarter EBITDA increased by $2.4 million while Adjusted Net Income increased by $3.0 million from comparable period prior year in the second quarter despite revenue and volume decreases of 17.0% and 24.1%. The lower net loss and increased EBITDA and net adjusted income is due to lower cost structure related to reducing administrative head count by 250 staff members during late first quarter of 2012. The lower loss is also due to lower amortization charges on intangible assets that were impaired on December 31, 2011.

For the six month period ended June 30, 2012, the Company generated $107.5 million in revenues, shipped 199,700 units of motorcycles and electric two-wheelers, and lost $2.6 million during the first six months of 2012. This represented revenue and volume decreases of 18.6% and 22.3% and a larger net loss compared with same period prior year. EBITDA was $2.7 million while the Adjusted Net Income was $284,000 in the six month period ended June 30, 2012. In the same period of 2011, the EBITDA was $6.5 million and the Adjusted Net Income was $1.6 million. The lower EBITDA and reversal of net income to net loss in 2012 were attributable to slower sales due to intensifying competition and slow economies in the Company's key markets. The effect of the cost cutting initiatives did not have an impact on the operating results until the second quarter of 2012.

Second Quarter, 2012

Second quarter, 2012 quarterly financial results
Q2 2012 Q2 2011
Revenue $ 52,085 $ 62,740
Cost of goods sold (47,647) (57,903)
Gross margin 4,438 4,837
Net profit (loss) (467) (2,308)
EBITDA 3,285 878
Adjusted net income (loss) 1,872 (1,118)
Adjusted EPS 0.01 (0.01)
Units shipped 95,600 126,000
Year to date June 30 financial results
Jan 1 - Jun 30, Jan 1 - Jun 30,
2012 2011
Revenue $ 107,481 $ 132,024
Cost of goods sold (99,685) (118,424)
Gross margin 7,806 13,600
Net profit (loss) (2,607) (708)
EBITDA 2,720 6,495
Adjusted net income (loss) 284 1,678
Adjusted EPS (0.00) 0.02
Units shipped 199,700 257,000

Large Motorcycles (above 50 cc motorcycles)

In the second quarter of 2012, large motorcycle sales totaled $45.5 million on shipments of 90,600 motorcycles with domestic sales representing 55.7% of total sales. This represented revenue and volume declines of 13.4% and 22.8% compared with the same period prior year. Second quarter 2011 domestic sales represented 44.5% of total sales.

Domestic market

The Company generated $25.3 million in domestic sales and shipped 48,100 units in the second quarter of 2012 which represented revenue increase of 8.3%, but volume decrease of 4.9% compared with same the period prior year. Revenue improved in the second quarter largely because of the introduction of Z-one, a new premium motorcycle line launched at the beginning of the second quarter of 2012.

Z-one is a suite of motorcycles that range from 125 cc to 250 cc targeted at younger riders in China's semi-rural areas. These motorcycles are priced at least 25% or more than comparable regular Zongshen motorcycles because these Z-one two-wheelers feature better riding technology and quality. At the end of July, 2012, the Company has sold more than 7,000 Z-one motorcycles.

The lower domestic sales volume is due to a slowing Chinese economy and intensifying competition brought on by the implementation of the motorcycle emissions standard set out in Country Standard No. 3 ("G3"). Due to uneven enforcement of the G3 standard, some producers continue to manufacture lower cost, but non-emissions compliant motorcycles, which has taken away sales from the Company and other larger producers. As a result, the Chinese motorcycle industry sales declined by 18.2% in first six months of 2012 to 5 million units compared with the first half of 2011 and thirteen out of the fifteen largest Chinese motorcycle manufacturers recorded volume decreases1 In during the first half of 2012.

Export markets

The Company generated $20.2 million in revenue and shipped 42,500 units of motorcycles in the second quarter 2012 which represented revenue and volume decreases of 30.8% and 36.3% compared with same period prior year.

Although demand remains strong in some of the Company's markets like Thailand and Burma, most of the ZPP's key export markets have declined. Slow local economy and appreciation of the RMB have impacted sales in Brazil and other countries in Latin America. The sales decrease on a comparative basis is also due to resurgent export sales that occurred in the first half of 2011 as export markets were recovering from the 2010 recessionary slowdown.

During late second quarter 2012, the Company also introduced Z-one Motorcycles to Peru and Columbia. These countries were the first export markets to receive these premium motorcycles where the Z-one's were introduced at several large scale product launch events.

1 Chinese motorcycle industry volume obtained from China Association of Automobile Manufacturers

Gross Margins & Cost Reductions

The gross profit (gross margin %) for the three month period ended June 30 2012 was $4.4 million (8.5%) declined from same period prior year where it was $4.8 million (7.7%) due to lower shipments. The overall gross margin for the quarter improved as a result of sales of higher margin Z-one motorcycle. For the six month period ended June 30 2012, the gross profit was $7.8 million (7.3%) compared with $13.6 million (10.3%). The lower gross margins realized in 2012 were due to lower sales volume and customer rebates granted at the beginning of 2012.

Overall, general & administrative expenses and distribution expenses decreased as a percentage of revenue due to lower sales volume and reduction of approximately 250 staff members. The reduction in staff is expected to generate savings of approximately $400,000 per quarter.

The Company also reached an agreement with its strategic partner and largest shareholder, the Zongshen Industrial Group during the second quarter, 2012 to reduce the interest rate on its promissory note from 10% to the Bank of China one-year lending rate. During the second quarter, this rate was 6.31% which reduced interest expense by $400,000 during the quarter. Subsequent to the second quarter of 2012, this rate was further reduced to 6.00%.

"We have made a series of strategic changes to protect our Company's profitability. In addition to introducing Z-one, our premium line of motorcycles which has been well received by our dealers in China and abroad, we have also rationalized our workforce to become a much leaner organization. There will continue to be challenges in the motorcycle industry as global economy is weakening. However, we are confident that our investment in new products and continued focus on cost savings will increase our company's competitiveness and position us for future growth," said Mr. Zongshen Zuo, CEO and Chairman of ZPP.

Earnings Call Details

ZPP will host a conference call to discuss the second quarter, 2012 results and answer questions. Please see details below:

Date: Wednesday, August 15, 2012

Time: 11:00 a.m. Eastern Time

Dial in number: 1-888-726-2470 (North America) or 1-913-312-1510 (International)

Live Webcast Link: http://public.viavid.com/index.php?id=101466

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 low-cost, high quality, environmentally friendly gas motorbikes, 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 June 30, 2012 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 June 30, 2012 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 Year ended December 31, 2011 and Quarter ended June 30, 2012" dated August 14, 2012 and filed SEDAR at www.sedar.com.

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