Zongshen PEM Power Systems Inc. Enters into a Non-Binding Letter of Intent to
Acquire the Two Wheeled Gas Motorcycle Business from Zongshen Industrial
Group Co., Ltd.

TSX:ZPP

VANCOUVER , Oct. 23 /CNW/ - Zongshen PEM Power Systems Inc. ("ZPP" or the "Company") (TSX: ZPP) announced today that it has entered into a non-binding letter of intent with its strategic partner and largest shareholder, Zongshen Industrial Group Co., Ltd. ("ZIG") to acquire (the "Proposed Acquisition") its two wheeled gas motorcycle business (the "Business").

The Company believes that the Proposed Acquisition represents a unique opportunity to acquire a leading Chinese motorcycle brand in one of the world's largest growth markets. In addition, the Company believes that the gas motorcycle business will provide ZPP with a strong manufacturing, technology and distribution platform for its electric motorcycle business. The Proposed Acquisition will also further align the interests of ZPP and ZIG.

"We believe that the China market for gas and electric motorcycles has tremendous growth opportunity. In the next few years, we expect the trend to be towards higher quality and better performace as Chinese consumers' needs and expectations evolve and demand superior products with willingness to pay a premium. In addition, we expect the Chinese government to promulgate and enforce stricter safety and emission regulations, which should eliminate a large number of manufacturers who will be unable to comply with these respective regulations," commented Zongshen Zuo, Chairman and CEO of ZPP. "These market conditions will require motorcycle companies to invest in new technology and manufacturing facilities. We believe this will lead to a consolidation in the industry, in which only the larger players will survive and prosper. The consolidation of the gas and electric motorcycle businesses of ZPP and ZIG is a first step in scaling up and realizing operational synergies."

The Proposed Acquisition is a "related party transaction" under Multilateral Instrument 61-101, and as such will require the preparation of a prescribed formal valuation (the "Valuation") and approval by shareholders of the Company other than ZIG, its related parties and joint actors.

The purchase price for the Proposed Acquisition (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 ended 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 acheiving growth targets, and will be definitively determined following an audit of the Business.

It is expected that 50% of the Purchase Price (or an amount equal to 4 times 2009 Net Income) will be in cash with 12.5 percent payable at the closing date of the Proposed Acquisition and the balance payable 18 months after the closing date.

The remaining 50% of the Purchase Price (or an amount equal to 4 times 2009 Net Income) will be satisfied by issuing shares of the Company at a deemed issue price of CAD$1.00 per share (the "Performance Shares"), which Performance Shares will be held in escrow and released based on the following performance targets:

    
    (a) 50% of the Performance Shares (or an amount equal to 2 times
        2009 Net Income) will be released at the closing date if the
        2009 Net Income is at least RMB 75 million.

    (b) A further 50% of the Performance Shares (or an amount equal to
        2 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 ended December 31, 2010 and December 31, 2011
        shall be at least 30%; or

    (c) A further 25% of the Performance Shares (or an amount equal to
        1 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 ended December 31, 2010 and December 31, 2011
        shall be at least 20% but less than 30%.
    

No Performance Shares will be released from escrow to the Vendor under clause (b) and (c) above if the compounded after tax net income growth rate of the Business for the financial years ended December 31, 2010 and December 31, 2011 shall be less than 20%. In this case, if the 2009 Net Income is at least RMB 75 million (CAD$11.8 million), the Purchase Price will be 6 times 2009 Net Income, or RMB 450 million (CDN$71.0 million).

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.

ZIG has estimated that the Business will generate approximately RMB 2 billion (CAD $315.4 million ) in revenue for the year ended December 31, 2009 and 2009 Net Income of approximately RMB 100 million (CAD$15.8 million). Based on that estimate, the Purchase Price will be approximately RMB 800 million (CAD$126.2 million).

The Company will now commence 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 .

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 ended December 31, 2009 , and the completion of a Valuation which supports the Purchase Price payable by the Company.

Forward-Looking Statements:

This news release contains forward-looking statements relating to the Proposed Acquisition, including statements regarding the terms and conditions of the Proposed Acquisition including the Purchase Price, the projected 2009 Net Income and revenues and other statements that are not historical facts. Such forward-looking statements are subject to important risks, uncertainties and are based on certain factors and assumptions such as foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective income tax rates. The results or events predicted in these forward-looking statements may differ materially from actual results or events. As a result, you are cautioned not to place undue reliance on these forward-looking statements.

The completion of the Proposed Acquisition is subject to a number of terms and conditions, including, without limitation: (i) approval of the TSX and applicable PRC regulatory authorities, (ii) required shareholder approval of the Company, (iii) satisfactory due diligence of the Business by the Company and the entering into of a definitive purchase agreement, (iv) completion of an audit of the Business for the financial year ended December 31, 2009 , (v) completion of the Valuation which supports the Purchase Price and (iv) certain termination rights which are expected to be available to the parties under the definitive purchase agreement. These approvals may not be obtained, or the conditions of the transaction may not be satisfied in accordance with their terms, and/or the parties to letter of intent or definitive purchase agreement may exercise their termination rights, in which case the proposed transaction could be modified, restructured or terminated, as applicable.

The forward-looking statements contained in this news release are made as of the date of this release. Except as required by applicable law, the Company disclaims any intention and assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional information relating to the Company, including the risks and uncertainties relating to the Company's business, may be found in the Company's filings with the Canadian securities regulatory authorities, which are available on SEDAR at http://www.sedar.com under the Company's profile.

For further information: Ali Mahdavi, Zongshen PEM Power Systems Inc., Vice President, Corporate Finance & Investor Relations, [phone], 1-877-775-8734, [email protected]