Zongshen PEM Power Systems Inc. Announces Second Quarter 2010 Financial
Results

TSX:ZPP

VANCOUVER, Aug. 6 /CNW/ - Zongshen PEM Power Systems Inc. ("ZPP" or the "Company") (TSX:ZPP), today announced its financial results for the three and six-month periods ended June 30, 2010. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

For the three-month period ended June 30, 2010, the Company reported revenues of $4.0 million versus $5.3 million in the corresponding quarter a year ago. Sales volume during the second quarter of 2010 totalled 14,000 units, compared with 14,000 units in the second quarter of 2009. During the quarter, the Company reported a loss of $1,262,000 or $0.02 per share, versus a loss of $944,000 or $0.01 per share for the second quarter of 2009.

For the six-month period ended June 30, 2010 the Company reported revenues of $7.5 million versus $13.1 million in the corresponding period a year ago. Sales volume during the first six-month period in 2010 totalled 25,000 units, compared with 35,000 units during the same period in 2009. During the six-month period, the Company reported a loss of $1,750,000, or $0.03 per share, versus a loss of $801,000, or $0.01 per share.

Subsequent to the quarter ended June 30, 2010 the Company closed the acquisition (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 over 3,000 employees and expanded product offerings of up to 250cc gas motorcycles. In the year ended December 31, 2009 the Motorcycle Business had revenue of over RMB 1.8 billion ($276 million) and net profit of approximately RMB 110 million ($17 million).

Prior to the Acquisition the Company was operating an early stage e-bike business and a gas bike business limited to 50 cc which had revenues of $20.9 million and a loss of $1.3 million for the year ended December 31, 2009. As of June 30, 2010, the Company employed approximately 230 people.

The Company is working to integrate the newly acquired business with its existing e-bike and small gas bike businesses. The Motorcycle Business experienced strong growth in earnings for the six-month period ended June 30, 2010, with net income expected to be over 30% higher than the same period in 2009. This growth was driven by unit sales growth of approximately 14% to more than 300,000 units and better margins due to improvements in the product mix.

As the Acquisition was completed after the end of the reporting period for these financial statements, no financial results from the acquired business are included in the Company's financial statements.

The aggregate purchase price (the "Purchase Price") payable by the Company to HKVAS is six times the after tax net income of the Motorcycle Business for the financial year ended December 31, 2009 ("2009 Net Income"). Pursuant to an auditor's report on the Motorcycle Business issued by PricewaterhouseCoopers Zhong Tian CPAs Co., Ltd. on May 7, 2010 and an amendment agreement entered into on June 2, 2010, the 2009 Net Income has been confirmed as RMB 110,266,000 ($16,892,790).

Accordingly, RMB 165,399,000 ($25,339,186) of the RMB 441,064,000 ($67,571,162) cash portion of the purchase price was paid to HKVAS on closing, with the remaining RMB 275,665,000 ($42,231,976) to be paid 18 months following closing, pursuant to a promissory note issued by the Company to HKVAS on closing. The promissory note bears zero interest for a period of eighteen (18) months, and shall bear interest at 10% per annum thereafter.

In addition 34,776,548 common shares in the capital of the Company were issued to HKVAS on closing and an additional 34,776,548 common shares were issued in HKVAS's name and delivered to an escrow agent to be held in escrow (the "Escrow Shares") for release, in whole or in part, pursuant to the terms of the vendor earn-out agreement entered into between the Company and HKVAS on closing.

Based on the vendor earn-out agreement, half of the Escrow Shares will be released from escrow to HKVAS if the after tax net income of the Motorcycle Business for the financial year ending December 31, 2010 shall be at least 120% of that of 2009's (the "2009 Net Income"). If however, the after tax net income of the Motorcycle Business for the financial year ending December 31, 2011 (the "2011 Net Income") shall be less than 144% of 2009 Net Income, then any Escrow Shares previously released shall be forfeited and surrendered to the Company for cancellation. If the 2011 Net Income shall be at least 169% of 2009 Net Income, then all Escrow Shares to the extent not previously released shall be released to HKVAS.

Based on the agreed upon RMB:$ exchange rate and the deemed issue price for the common shares, the purchase price paid on closing and the maximum vendor earn-out payable through the release of the Escrow Shares equal approximately 6 and 2 times the 2009 net income for the Motorcycle Business respectively.

As such, ZIG, now beneficially owns, controls or directs, directly or indirectly through HKVAS, an aggregate of 62,637,976 common shares (or 63.45% of the Company's outstanding common shares excluding 34,776,548 common shares held in escrow), and up to 97,414,524 common shares (or 72.97% of the Company's outstanding common shares assuming no other common share issuances) if all of the Escrow Shares are eventually released to HKVAS.

The Motorcycle Business experienced strong growth in earnings in the first six months of 2010 and the integration of Motorcycle Business is expected to make a significant contribution to the Company's financial performance for the third and fourth quarters of 2010. In the short term, revenue and earnings growth are expected to be driven by the gas motorcycle business, providing a strong financial, technology and distribution platform for the longer term growth plan for the electric products business.

The Company will host a conference call on Monday, August 9, 2010 at 10:00 a.m., Eastern Daylight Time (EDT) to further discuss the second quarter 2010 financial and operational results.

Dial in information is as follows:

    
    Dial in number: 1-888-329-8903 (North America) or 1-719-325-2392
    (International)

    Taped Replay: 1-877-870-5176 (North America) or 1-858-384-5517
    (International)

        From: 08/09/10 @ 1:30 pm Eastern Daylight Time

        To: 08/23/10 @ 11:59 pm Eastern Daylight Time

    Taped Replay Pass Code: 2409392

    Live Webcast Link: http://viavid.net/dce.aspx?sid=00007979
    

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 motorcycles, engines, and power equipment.

Forward Looking Information

This release contains forward-looking statements, which may be identified by statements containing the words "will", "anticipate", "expect", "intend" and other similar expressions. These statements are based on certain factors and assumptions including foreign exchange rates, expected growth and sales, results of operations, performance, and business prospects and opportunities and effective income tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Several factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to: our relationship with Zongshen Industrial Group; fluctuations in market demand for small gas motorbikes and e-bikes; changes in competitive pressures, including pricing pressures; timing and amount of capital expenditures; changes in financial and capital markets and corresponding effects on the company's investments; changes in currency and exchange rates; and the effects of government policy and regulations. Additional risks and uncertainties can be found in our MD&A for the interim period ended June 30, 2010 and in our other filings with the Canadian securities commissions. Forward-looking statements are given only as at the date of this release and the company disclaims any obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

For further information: Contact Information: Frank Chen, Zongshen PEM Power Systems Inc., Chief Financial Officer, 1-604-687-7908, [email protected]