Zongshen PEM Power Systems Inc. Announces Amendment to Master Support Agreement with Zongshen Industrial Group

08:00 EDT Tuesday, August 12, 2008

    <<
    -   Company reaffirms 260,000 units in sales and updates product mix
        guidance for 2008
    -   ZPP expands product portfolio by entering low emission gas products
    >>

TSX Venture Exchange: ZPP

VANCOUVER, Aug. 12 /CNW/ - Zongshen PEM Power Systems Inc. ("ZPP" or "the Company") (TSXV:ZPP), announced today that it has reached an amending agreement (the "Amendment") with its major shareholder, Zongshen Industrial Group ("ZIG") to amend the Master Support Agreement ("MSA") which was signed and announced in January 2008.

The Amendment grants ZPP the exclusive global rights to the production and sale of low emission gas motorbikes with an engine capacity of up to 50cc's.

Under the terms of the original MSA, ZPP was granted the exclusive right to all alternative power products business, including electric vehicles, and ZIG agreed to not compete with ZPP in the alternative power source business for an initial period of 10 years. In addition, the MSA provided that ZIG would provide ZPP access to its corporate resources at cost including, without limitation, distribution, research and development, design, marketing and production expertise. ZPP was also granted the right to use the Zongshen brand with no license fees. In return for this support, ZIG has the right to maintain a minimum 25% ownership of ZPP through participation in any equity or equity-related financing. Under the Amendment, the MSA now also applies to the production and sale of low emission gas motorbikes with an engine capacity of up to 50cc.

Prior to the Amendment, the small gas motorbikes were manufactured by ZPP out of its Wuxi plant and by ZIG from its base in Chongqing. Under the Amendment, the small gas bike business will be consolidated under ZPP. The small gas bikes are produced using the same production lines that are used to produce ebikes. Accordingly, the existing Wuxi plant, when combined with the Chongqing plant that is currently under construction, will provide the Company with flexibility and capacity to expand both product lines.

The Company and ZIG have been experiencing a surge in demand for small gas bikes in both the China and export markets, driven mainly by the increasing cost of fuel. As a result, much larger than expected orders for have been received by ZPP and ZIG for small gas bikes (below 50cc) which will now be owned, supplied and serviced by ZPP with full support from ZIG.

The Company reaffirms its previously stated guidance to sell 260,000 units in 2008, however, small gas bikes are expected to represent the majority of sales, while e-bikes are expected to represent less than 30 percent of total unit sales. The Company has been focusing on building a market for premium ebikes in China and export markets in Asia, offering better styling and performance for a higher price point. There has been strong interest in the Company's line of premium ebikes from dealers in China and Asia, but it has taken longer than expected to educate the consumer base in China and Asia about the benefits of ZPP's premium ebikes.

"The small gas bike business has grown beyond our initial expectations and it was time to consolidate the business under ZPP or ZIG. Since they are low emission vehicles and use some of the same production technology as ebikes, we decided to add the low emission gas bikes to the ZPP product offering. The market for small gas motorbikes has great growth potential in China and export markets, and is fully supported by the Zongshen brand, distribution network and manufacturing technology." noted Zongshen Zuo, Chairman and CEO of Zongshen PEM Power Systems Inc. "While low emission gas bike sales have far exceeded our expectations for 2008, we will not meet our 2008 target for e-bike sales. Premium ebikes are a new product for the Zongshen brand and we are increasing our efforts to activate and educate the existing distribution channels in China and add new pure ebike dealers to our channel. We also plan to expand international markets for e-bikes, where we can generate our best margins due to less price sensitivity and less competition. In addition, we need to launch additional models of our premium e-bikes to provide more choice to the consumer. Our experience in 2008 will prepare us for a great year in 2009 for e-bikes. We believe that we are about one year behind in our e-bike plan and are confident that we will have the e-bike product and marketing platform ready for 2009. In the meantime the current combined strength level of the small gas and electric bikes will allow us to meet our targets."