Zongshen PEM Power Systems Inc. Announces Third Quarter 2007 Financial Results

Zongshen PEM Power Systems Inc. Announces Third Quarter 2007 Financial Results

Zongshen PEM Power Systems Inc. announced it’s three and nine month period ended September 30, 2007 financial results: currency amounts are in Canadian dollars. Revenues increased an electrifying 208% from the second quarter and the net loss decreased from $360,463 to $223,679. Revenues for the nine month period ended September 30, 2007 were $8.65 million. The company issued 11.5 million common shares in a private placement for gross proceeds of $35.2 million in November 2007. Zongshen PEM Power Systems trades under the symbol ZPP on the Toronto Venture Stock Exchange.

Zongshen PEM Power Systems Inc. is engaged in the business of alternate power systems which includes batteries, fuel cells and solar power, for consumer and industrial use. The Company manufactures electric motorcycles, electric bicycles and other e-vehicles in China for both the 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. Zongshen Group will continue to support ZPP's growth and play a significant role in its future success through its mass marketing, brand name, research and development, product design & development, production, and distribution network.

Zongshen PEM Power Systems stock is currently trading at $3.53. So what should a company with no earnings, accelerating sales growth and colossal growth prospects be trading at? Although Honda Motors and Zongshen PEM Power Systems are not in the exact same business they are both manufacturers of vehicles, so let’s use Honda as a reference point to estimate Zongshen PEM Power Systems earnings potential based on Honda’s net profit margins. Take into account of course that Honda is one of the premier vehicle manufacturers in the world and operates one of the most cost efficient structures in its industry so this comparison is being quite generous. Honda’s net margins for the past year were 4.6%. With $8.65 million in sales for the first nine months, if Zongshen PEM Power Systems achieves the same revenue increases for the fourth quarter as it did for the third quarter its revenues for the fourth quarter would be $15.9 million and $24.56 million annually. A 4.6% net margin would produce $1.13 million in net earnings. This would produce EPS, with 41,291,000 weighted shares outstanding, of $0.027 for a PE multiple of 130. Honda’s PE multiple is currently at 9. However, Zongshen is a much smaller company with ample room for robust growth and in a gigantic market. At a generous PE multiple of 50 Zongshen PEM Power Systems would trade at $1.35, far below its current $3.53 stock price. One must take into account that Zongshen is currently not operating at a profit so one is making some very extremely optimistic assumptions when trying to arrive at a fair valuation of its stock price. The positives for Zongshen PEM Power Systems are that as long as it has Zongshen Industrial Group as a major shareholder it will have the financial muscle needed to continue operating while improving its technology and increasing revenues and market share at accelerating rates. The key of course will be if they can reduce their cost structure to the point where they are able to produce a net profit. If they can accomplish this they will be on an electrifying bicycle path to success. For now however, based on its fundamentals, it is difficult to see this stock selling at more than $1.00. This may be a better time to put on the brakes, get off your electric bike, and take a rest on the park bench before you get electrocuted.

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