Zongshen PEM Power Systems Inc. (ZPP), is building an e-bike production facility in Chongqing, China with initial capacity of 600,000 e-bike units per year. The total cost of land, construction and two production lines is expected to be about $8 million (RMB 55 million).
The production facility has been designed such to be expanded to four production lines with total production capacity of 1.2 million e-bike units with an incremental investment of approximately $1.5 million (RMB 10 million). Construction of the new facility is expected to be completed in early 2009, with production expected to commence in early March 2009.
Zongshen Industrial Group (ZIG), the company's major shareholder, will continue to manufacture premium e-bikes for ZPP at cost pursuant to the Master Support Agreement, until the new facility is completed.
ZPP has agreed to acquire the land for the production facility from ZIG for a price of $1.9 million (RMB 12.5 million), subject to an independent third party valuation due to the related party nature of the transaction. ZPP believes that the market value of the land is in excess of $3 million (RMB 20 million).
The estimated average selling price per unit of the premium e-bikes to be manufactured at the new facility in Chongqing is $400 (RMB 3,000). The company believes it can earn net income margins of at least 10 percent on its premium e-bikes. Accordingly, the company believes that it will earn a full payback on its capital investment within 12-18 months of the completion of the new facility.
After expansion of the new facility's capacity to 1.2 million units, the plant will be able to generate revenues of $480 million and net earnings of about $50 million, based on the current estimated prices and margins. ZPP has sufficient cash on hand to complete the construction of the plant and to expand it to 1.2 million units, the company says.
The use of proceeds from the $35 million private placement closed in November 2007 included $7 million for construction of the new facility in Chongqing with an estimated initial capacity of 200,000 e-bike units. As set out above, the Company has increased the construction budget to $8 million and the initial capacity to 600,000 e-bike units.
"The significant demand from more than 1,100 dealer and distributors in China and our great progress in export markets resulted in our order book exceeding 152,000 e-bike units just in the first quarter of 2008 and provided us with tremendous confidence to move forward with the design and construction of a larger scale e-bike facility in Chongqing than we had previously planned," said Zongshen Zuo, chairman and CEO of Zongshen PEM Power Systems Inc. "The return on capital is extremely attractive for this new plant since our team has done an exceptional job to increase average selling prices and net margins. The new facility is designed such that annual capacity can be expanded to 1.2 million premium e-bike units, consistent with our strategy to be a leading provider at the top end of high quality e-bikes in China, while attracting strong interest from export markets."