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Vancouver’s Zongshen PEM Power Systems Inc. navigating rocky road to revenue in China’s lucrative electric bike market Krisendra Bisetty Backpedalling from ambitious plans to crack into China’s booming but highly competitive electric bike market is costing a Vancouver company dearly. Zongshen PEM Power Systems Inc. (TSX:ZPP) has shifted its focus to making quick sales from small gas scooters – even though the new motorcycles are banned by some Chinese cities to help decrease carbon-based emissions. Its plant in Wuxi, China, was recently geared up for an e-bike capacity of approximately 200,000 units a year on a two-shift basis, and a second factory with a capacity of up to 1.2 million bikes is about to come on stream in 2009.
At full capacity, Zongshen had expected the plants to generate annual e-bike revenue of $480 million and net earnings of approximately $50 million. Its second-quarter sales, however, included a “disappointing” 1,185 e-bikes, and while the company still expects to sell 260,000 units for fiscal 2008, its Chinese production lines will churn out small gas bikes that it now says will represent most of its sales. “We learned some lessons in 2008,” board member Kim Oishi said in a conference call with investors and analysts. “Every growth business is going to have ups and downs.” The company’s share price has taken a whacking. It recently dropped to $0.85 from a peak of $4.14 last November. Despite the “hiccups” in its strategy and the “very dramatic” stock sell-off, Zongshen still has good prospects, said an analyst who spoke on condition of anonymity. The analyst added that investors don’t fully appreciate the revenue potential of the gas scooter business. “It looks to be a very profitable business and should generate very good revenue for them.” For the three-month period ended June 30, the company reported a 321% jump in revenue to $7.1 million compared with the same period last year from the sale of 22,715 units. That total also included 10,654 small gas bikes and 11,106 gas and electric bike kits. Net income during the quarter was $673,777, marking the company’s second consecutive quarter of profitability. As it tries to get its electric bike business back on track, Zongshen has essentially been handed a new business by its majority shareholder, Zongshen Industrial Group: making Vespa-type gas scooters with an engine capacity of up to 50cc. Zongshen Industrial is a large Chinese conglomerate with interests in the thermodynamic machinery industry and engine products. Its annual revenue is around $1.3 billion. Zongshen Zuo, its founder and president, recently took over as CEO at Zongshen PEM to drive that company’s new growth strategy. Oishi said the Vancouver company is also eyeing new products, including three-wheeled vehicles and electric cars, but with a joint venture partner. “The vision for the company is not to be just an e-bike company or a gas bike company, but to be an alternative power systems company.” But Zongshen remains “very confident” on e-bikes, said Oishi, the market for which in China has grown to an estimated 20 million in sales in 2007-08 from 1.6 million in 2002. There’s fierce competition, however, among an estimated 2,000 e-bike manufacturing companies. Zongshen blamed the company’s disappointing e-bike sales on issues related to its distribution channels and production. It has consequently dispatched its Canadian executives, CFO Frank Chen, and Ali Mahdavi, vice-president of corporate finance, to China to sort out problems that include communications and reporting between the two countries, which the company attributed to “growing pains” and cultural and language issues. “There’s no magic to that,” said Oishi. “You just have to do the hard work.” Having part of its management team and board in Canada is also proving to be a challenge, although Oishi told Business in Vancouver that trend seems to be picking up as more companies with operations in China seek listings here to tap not only funds, but human resource expertise, technology and brand “enhancing.” However, to be successful, he said they have to hire executives and staff that understand China business and lawyers and auditors that have expertise in China and North America. By press time, Zongshen’s shares were listed at $0.65 on the Toronto Stock Exchange. But the fall in the company’s share price is providing compelling valuations, GMP Securities L.P. analyst Justin Wu said in a note to clients. Wu, who estimates the new gas scooter business should generate annual revenue of between $50 million and $60 million, has maintained a “buy” recommendation on the stock and a target price of $4.85. •
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