Zongshen PEM Power Systems Inc. Announces Third Quarter 2009 Financial
Results

VANCOUVER , Nov. 12 /CNW/ - 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, 2009 . All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

For the three-month period ended September 30, 2009 , the Company reported revenues of $5.8 million versus $23.8 million in the corresponding quarter a year ago. Volume sales during the third quarter of 2009 totalled 16,971 units, compared with 87,355 units in the third quarter of 2008. As a result of lower volume sales and ongoing fixed costs, gross profit decreased to $334,668 or 6 percent of revenues compared to $2,646,445 or 11 percent of revenues. During the quarter, the Company recorded a net loss of $445,635 compared to a net income of $1,340,867 during the same period in 2008.

For the nine-month period ended September 30, 2009 the Company reported revenues of $18.9 million compared with $37.4 million in the corresponding period a year ago. Volume sales during the first nine-month period in 2009 totalled 52,244 units, compared with 133,483 units during the same period in 2008. During the nine-month period, the Company reported a net loss of $1,246,893 , or $0.02 per share on diluted basis, versus a net income of $1,701,042 , or $0.02 per share on diluted basis for the same period in 2008.

The decline in unit sales in the third quarter and in the first nine months of 2009 was mostly driven by the falling demand in international market and fierce price competition in China's domestic market. The Company's strategy on electric motorcycles is to remain focused on development of premium electric motorcycles for the Chinese and international markets. The Company has chosen not to compete in the China's high volume, low-end market for electric motorcycles with low selling prices and depressed margins. The current market generates extremely low profit margins for electric motorcycle manufacturers. It is ZPP's belief that the China market for premium electric motorcycles will grow driven by consumer demand for better electric products and stricter government regulations for safety and performance, allowing ZPP to replace the low-end competition and gain significant market share with premium products. To that end, ZPP has identified target markets in China where consumers are less price sensitive and demand better performance and has been assessing electric motor, control system and battery technologies to develop premium products with a price point that can generate volume sales in the target markets.

At September 30, 2009 , the Company was debt free with cash and cash equivalents amounting to $36.5 million , compared to $33.2 million at December 31, 2008 .

Subsequent to quarter-end, on October 23, 2009 , the Company announced that it had entered into a non-binding letter of intent (the ("LOI") with ZIG, to acquire its two-wheeled gas motorcycle business (the "Business"). The purchase price is expected to include a base price of up to 6 times of the net income of the Business for the financial year ending December 31, 2009 (the "2009 Net Income") to be paid at the closing date, and performance payments of up to 2 times 2009 Net Income to be paid subject to achieving growth targets, and will be definitively determined following an audit of the Business.

ZIG has estimated that the Business will generate approximately 2 billion RMB ( $315.4 million ) in revenue for the year ending December 31, 2009 , and 2009 Net Income of approximately 100 million RMB ( $15.8 million ). Based on that estimate, the purchase price would have a base price of 600 million RMB ( $94.7 million ) and performance payments of up to 200 million RMB ( $31.5 million ) for a total price of up to 800 million RMB ( $126.2 million ).

The base price of six times 2009 Net Income is contemplated to be comprised of two thirds cash with 12.5 percent of the cash payable at the closing date of the proposed acquisition and the balance of the cash payable 18 months after the closing date. The one third balance of the base price is expected to be satisfied by issuing shares of the company at a deemed issue price of $1.00 per share.

The performance payments of up to 2 times 2009 Net Income are expected to be satisfied by issuing shares of the company at a deemed issue price of $1.00 per share. The performance payment shares will be held in escrow and released based on the following performance targets:

    
    a)  performance shares equal to two times 2009 Net Income will be
        released from escrow to ZIG, if the compounded after tax net income
        growth rate of the business for the two financial years ending
        December 31, 2010, and December 31, 2011, shall be at least 30
        percent; or,
    b)  performance shares equal to one times 2009 Net Income will be
        released from escrow to ZIG, if the compounded after-tax net income
        growth rate of the business for the two financial years ending
        December 31, 2010, and December 31, 2011, shall be at least 20
        percent but less than 30 percent.
    

No performance shares will be released from escrow to the vendor if the compounded after-tax net income growth rate of the business for the financial years ending December 31, 2010 , and December 31, 2011 , shall be less than 20 percent. Performance shares that are not released from escrow to the vendor following the determination of the performance targets will be forfeited to the company and cancelled.

The Company has commenced its due diligence investigation of the business, and has constituted a special committee of the board of directors to review and consider the proposed acquisition. Assuming satisfactory due diligence, recommendation of the special committee and approval of the board of directors of the company, the Company and ZIG expect to enter into a definitive purchase agreement with respect to the proposed acquisition by no later than December 31, 2009 .

As previously disclosed, completion of the proposed acquisition will be subject to a number of conditions including the receipt of board, regulatory, TSX, shareholder, and other governmental and third party approvals and consents, entering into of the definitive purchase agreement, the completion of the audit of the business for the financial year ending December 31, 2009 , and the completion of a valuation which supports the purchase price payable by the company.

Due to the turbulent global economic environment, 2009 is a challenging year for the electric motorcycle and small gas motorcycle markets. The Company estimates business volume of 2009 will be significantly lower than that of 2008. With respect to the electric motorcycle business, the Company continues its efforts with the goal of developing premium products for the China market and selected international markets, including assessing electric motor, control system and battery technologies for its product offering. The Company welcomes the government's introduction of new electric motorcycle standards. The Company believes that the implementation of new standards will eventually drive substandard electric motorcycle producers out of the market, subject to strict enforcement of new standards. With respect to the gas motorcycle business, the Company believes that the proposed acquisition of the two-wheel motorcycle business from ZIG represents a unique opportunity to acquire a leading Chinese motorcycle brand and expand its offering of gas motorcycle products for the world's largest growth market. The proposed acquisition will also further align the interests of ZPP and ZIG and drive synergies in brand, manufacturing and distribution.

The Company remains confident in the future prospects of the electric motorcycle business and expects that in due course, consumer demand for better products and government regulations for safety and performance along with the Company's ability to produce an advanced electric motorcycle will allow ZPP to displace the low-end competition and gain significant market share in China . ZPP expects to take full advantage of the demand for two-wheeled gas motorcycles in the China domestic market and selected international markets, thus driving revenue and earnings growth, while the electric motorcycle business segment is being prepared for mass market penetration in China and selected international markets.

"In 2009, ZPP has conserved resources as we restructured our electric motorcycle business and considered acquisition opportunities. While we believe that electric vehicles are the product of the future, China is the worlds largest growth market for gas motorcycles, accounting for 15 million units, or about 30 percent of the global unit volume, in 2008. We believe that the combination of ZIG's larger gas motorcycle business with ZPP's early stage electric motorcycle business will maximize synergies in manufacturing, R&D, brand and distribution. We believe the China market for gas and electric motorcycles will grow in unit volume and price as consumers demand better performance and the government enforces stricter safety and emissions standards. This will drive a consolidation where the larger players who are able to make investments and technology, manufacturing and distribution will thrive," noted Zongshen Zuo, Chairman and CEO of Zongshen PEM Power Systems Inc. "The proposed acquisition of ZIG's gas motorcycle business will position ZPP to be a leading player in the gas and electric motorcycle business as it develops better products and considers further acquisitions, since ZIG is already in the top ten of some 130 gas motorcycle manufacturers in China . I look forward to working with the ZPP team and executing on this transformational transaction in the months to come."

The Company will host a conference call on Friday, November 13, 2009 at 11:00 a.m., Eastern Time (ET) to further discuss the third quarter 2009 financial and operational results.

Dial in information is as follows:

    
    Dial in number:          1-888-378-0327 (North America) or 1-719-325-2365
                             (International)

    Taped Replay:            1-888-203-1112 (North America) or 1-719-457-0820
                             (International)

    Taped Replay Pass Code:  4010036 (Available until November 27,
                             11:59 p.m. ET)

    Live Webcast Link:       http://viavid.net/dce.aspx?sid=00006CBB
    

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 is engaged in the commercialization of alternative power systems including batteries, fuel cells and solar power, for a variety of consumer and industrial applications. The Company manufactures low-cost, high quality, environmentally friendly small 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 September 30, 2009 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: Ali Mahdavi, Zongshen PEM Power Systems Inc., Vice President, Corporate Finance & Investor Relations, [phone], 1-877-775-8734, [email protected]