Zongshen PEM Power Systems Inc.

Zongshen PEM Power Systems Inc.

March 30, 2012 19:46 ET

ZPP Reports Year-End Financial Results for 2011

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 30, 2012) - Zongshen PEM Power Systems Inc. (TSX:ZPP) ("ZPP" or the "Company"), today announced its financial results for year ended December 31, 2011. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

Results of Operations

Annual financial results
Year ended December 31, 2011 20101
Revenue $ 275,750 $ 138,922
Cost of goods sold 249,627 122,153
Gross margin 26,123 16,769
Operating expenses (30,138 ) (18,883 )
Impairment of goodwill and intangible assets (100,374 ) -
Other income (expense) (5,800 ) 1,606
Tax recovery 5,656 237
Subtotal (130,656 ) (17,040 )
Net loss (104,533 ) (271 )
Loss per share (1.06 ) (0.00 )
Adjusted net income (loss)2 333 (396 )
Adjusted EPS 0.00 (0.00 )
EBITDA2 11,441 4,804
Units shipped 529,000 275,000
(All numbers in 000's except for unit shipped)
  1. The annual financial results for 2010 only included the financial results of the Motorcycle Business for the second half of 2010 because the Motorcycle Business was acquired on July 2, 2010.
  2. The computation of the Non-IFRS Performance Measures are detailed in Company's annual Management's Discussion and Analysis for the year ended December 31, 2011 filed on SEDAR.

The Company generated a loss of $104.5 million for the year ended December 31, 2011 primarily due to impairment charges to the intangible assets and goodwill that totaled $100.4 million. The initial value of the intangible assets and resulting goodwill were calculated using a financial forecast which involved using certain assumptions over revenue and profit growth. As a result of the challenging market conditions that the Company, and other large Chinese motorcycle manufacturers are facing, as described below, the Company did not meet these revenue and profit projections, which lead to a downward revision of the Company's financial forecast. As a result, the Company recorded a non-cash impairment charge of $16.3 million to intangible assets and $84.1 million to goodwill for the year ended December 31, 2011.

The 34.8 million escrow shares which were valued at $37.6 million, issued as part of the contingent consideration for the Motorcycle Business acquisition, were cancelled on March 15, 2012 as the Motorcycle Business's income did not reach the required minimum earnings level for the escrow shares to be released.

2011 Business Review

ZPP generated revenues of $275.7 million, a net loss of $104.5 million, earnings before interest, taxes, depreciation and amortization ("EBITDA") of $11.4 million, adjusted net income of $333,000 in 2011, compared to revenues of $138.9 million, net loss of $271,000 and EBITDA of $4.8 million,adjusted net loss of $396,000 in the same period of 2010. Fiscal 2011 is the first year that incorporates the full year of the Motorcycle Business, which the Company acquired on July 2, 2010, and as such the 2010 financial results only included the third and fourth quarters. The Company's net loss is primarily due to the impairment charge of $100.4 million as described above.

The Company was able to generate $11.4 million EBITDA in 2011 because of strong export sales that grew 30.0% from pro-forma 2010, despite a difficult Chinese domestic market that has affected large Chinese motorcycle manufacturers.

Fiscal 2011 Fiscal 20101 Pro-forma 20102
Units 000'$ Units 000'$ Units 000'$
Large gas bikes 500,900 232,940 240,500 111,030 567,000 276,498
Small gas bikes 22,000 7,209 26,300 8,385 26,300 8,385
Electric two wheelers 5,600 2,927 8,600 2,949 8,600 2,949
Parts and other revenues - 32,674 - 16,558 31,227
Total Revenue 528,500 275,750 275,400 138,922 601,900 319,059
Net Income (loss) (104,533 ) (271 ) 8,895
  1. Fiscal 2010 only includes the third and fourth quarter of the Motorcycle Business as it was acquired by the Company on July 2, 2010.
  2. Pro-forma 2010 includes the financial results and shipment numbers for the Motorcycle Business for the entire 2010 year. These figures are not audited.

Large Gas Bikes

The Company generated $232.9 million in sales and shipped 500,900 units of large gas motorcycles in fiscal 2011. This is an increase in sales of $121.9 million and volume of 260,400 motorcycles compared fiscal 2010. On an annual comparative basis, the 2011 sales decreased 15.8% and the shipments decreased 11.6% from pro-forma 2010.

The Company generated $116.4 million in sales and shipped over 237,100 gas motorcycles in the domestic Chinese market in 2011. The 2011 domestic sales decreased 34% and shipment decreased 37.9% from pro-forma 2010 as the Company and other large Chinese motorcycle manufacturers faced challenging market conditions caused in part by a change in motorcycle emission standards that was first introduced in July 2, 2010 set out Country Standard No. 3 ("G3").

The Chinese domestic motorcycle industry sale decreased by 8.3% to 16.2 million1 motorcycles in 2011 from prior year. However, the domestic volume for the ten largest Chinese motorcycle manufacturers dropped by 22.8% and their collective market share of the overall domestic market went down to 38.0% in 2011 from 45.2% the year prior.2 Industry research from the Vehicle Internet Data Center indicates that the overall industry profit for the ten largest Chinese manufacturers dropped by 18.8% in 2010.3 ZPP which produces higher priced products because of power and quality differentiation has seen volumes dropped more than its industry peers because competition is price-based.

The Company's export sales improved significantly in 2011 from 2010. The total revenue for export sales in 2011 was $116.5 million and volume was 264,000 units. The 2011 export sales improved 30% and shipment increased by 42.6% from pro-forma 2010. The total Chinese motorcycle industry export was 10.7 million units in 2011, an increase of 27.5% from 2010. The Company was able to grow its export volume above the industry growth rate because ZPP has established distribution partners in key growing markets such as Brazil and Thailand.

Small gas bikes and electric two-wheelers

The Company sold 27,500 small gas bikes and electric two-wheelers and generated $10.1 million in revenue which is a decrease of 21.2% in volume and 10.6% decrease in revenue compared to fiscal 2010. The Company is refocusing its resources to produce higher performing electric motorcycles which the Company believes will represent a larger part of the overall motorcycle industry in the coming years. During the third quarter, 2011, the Company introduced three additional electric motorcycles for its domestic and export markets.

Net loss & Gross Margin

The Company generated a net-loss of $104.5 million in fiscal 2011 which as described above is primarily attributable to the non-cash net impairment charge of $100.4 million to the Company's intangible assets and goodwill. Also contributing to a loss is a lower gross margin which was 9.5% of revenues in 2011 compared with 12.1% for 2010. The gross margin for the Company decreased in fiscal 2011 compared to the previous year, as there was an increase in production costs related to manufacturing G3-compliant motorcycles as well as other higher input costs in labor and materials. As the motorcycle market became more price-competitive, the Company has not been able to pass all these cost increases to its customers.

Deferral of Interest Payment Option

Subsequent to December 31, 2011, the Company reached an agreement with HKVAS, the vendor of the Motorcycle Business and holder of the Company's $44.5 million promissory note to grant the Company the option to defer the semi-annual interest payments on the promissory note indefinitely and exclude the unpaid interest portion from the principal on which interest is calculated.

Company Outlook

The Company believes that 2012 will be EBITDA positive driven by increased sales in the domestic market.

The sales for the domestic market are expected to stabilize and improve from 2011. The Company has established new distribution relationships in Shandong (east China) and Heilongjiang (northeast China) to re-invigorate sales in these regions. The Company will introduce a suite of premium motorcycles, Z-one which will be the center of its advertising campaign for most of 2012. These Z-one motorcycles range from 125 cc to 250 cc and will be available in the second quarter of 2012. The Company also expects to launch a large-scale advertising campaign during the third quarter of 2012 to celebrate Zongshen Motorcycle 20th anniversary and to raise the profile of the Zongshen motorcycle brand.

The export markets which experienced strong growth in 2011 is expected to moderate in growth in 2012. The high growth markets such as Brazil and other countries in Latin America have experienced slower economies in the fourth quarter of 2011 which the Company expects to persist in 2012. The Company will increase branding and advertising spending in Southeast Asia where the gas motorcycle demand is expected to grow from 13 million to 17 million over next three years and will enter the Indonesian market in 2012. Indonesia is the third largest motorcycle market in the world after China and India, with more than 7 million motorcycles sold in 2011. The Company is also in the process of securing distributors in new markets in countries in Central and Latin America.

During the first quarter 2012, the Company also signed a cooperation agreement with S&T Motors Co, Ltd. ("S&T"), a Korean motorcycle manufacturer, to expand the Company's export product suite to include motorcycles that range up to 650 cc. S&T Motors and the Company will also share export distribution channels. These jointly developed motorcycles will initially be sold in the Company's more mature export markets like Thailand in the third quarter 2012.

The Company will continue to increase the level of cross-selling of its electric two-wheelers in its larger gas motorcycle distribution network, which will involve increased dealer training and joint-promotional activities to promote these products.

"We are encouraged by the strong growth of our export shipments, in particular to Latin America and Southeast Asia. Though we expect export growth to moderate, we will introduce larger motorcycles and increase our marketing as part of our goal to expand our footprint outside of China. The Chinese motorcycle industry is undergoing a fundamental change mostly felt by large manufacturers like ZPP, and in this environment we will continue to invest in our brand and introduce new products to stabilize our market position and prepare us for growth in the coming years," said Mr. Zongshen Zuo, CEO and Chairman of ZPP.

Non-IFRS Performance Measure

The Company discloses that EBITDA and Adjusted Net Income (Loss) 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 annual Management's Discussion and Analysis for the year ended December 31, 2011 filed on SEDAR.

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

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

Forward-looking Information

This Press Release contains within the meaning of Canadian securities legislation (hereinafter referred to as "forward-looking statements"). All statements, other than statements of historical fact, included herein including, without limitation statements relating to the estimated future performance of the Company and market performance, are forward-looking statements. 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. 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 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 implementation of motorcycle emission standards subsequent to G3, 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 motorcycles; uncertainties related to the market supply and demand of 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. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. Accordingly, readers should not place undue reliance on forward looking statements. Some of these risks, uncertainties and factors include those disclosed herein and under the heading "Risk Factors" in the Company's Annual Information Form dated March 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 30, 2011" dated March 30, 2012 and filed SEDAR at www.sedar.com.

1 Based on pro-forma 2010 which includes the financial results and shipment numbers for the Motorcycle Business for the entire 2010 year. These figures are not audited.

2 Chinese motorcycle industry volume and growth rate obtained from China Association of Automobile Manufacturers.

3 2011 Chinese Motorcycle Sales

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
    1.604.677.7008 (FAX)